For the industry overall, the Federal Reserve’s rate cuts last year may have proved to be a mixed blessing. Lower interest rates undoubtedly eased payment pressures on many borrowers and prevented further deterioration in the quality of bank loan portfolios.
Liability-sensitive banks saw their funding costs fall faster than loan and investment yields, and more than half of all banks had a wider net interest margin in the first quarter of 2002 than in 2001. However, lower interest rates will begin to narrow net interest margins for some institutions.