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Rising interest rates impacts banks

A customer prepares to leave a Wells Fargo Bank branch office on July 12, 2012 in Daly City, Calif.

Updated 10 a.m.: JP Morgan Chase and Wells Fargo reported higher profits Friday, after a quarter in which interest rates rose sharply. Many Americans -- especially those shopping to buy a home -- are fretting about higher interest rates.

But banks have a different perspective.

“Overall it’s good news for the banks, because that means banks earn more on their loans and the securities that they have,” says Fred Cannon, director of research at Keefe, Bruyette & Woods.

As interest rates rise, banks can charge more for loans. Remember, banks get money at short-term rates, and those have stayed low. They lend money at long term rates -- and those have risen about one percentage point since May.

“Because of that, the spread between borrowing and lending has widened,” says Jack Ablin, chief investment officer for BMO Private Bank. “And that should help feather bank profits over the coming quarters.”

That is, as long as those rising rates reflect an improving economy -- and not just anxiety about a change in the Federal Reserve’s easy-money policies. And, as long as the cost of loans doesn’t rise so fast that it deters people and businesses from borrowing.

For the past quarter, Wells Fargo said its mortgage business grew despite the spike in interest rates. Overall, the San Francisco bank's net profit rose 19 percent. JP Morgan reported a 31 percent jump in profit. But loan demand remained weak due to what CEO Jamie Dimon called "soft" U.S. growth. Both banks boosted their bottom lines in part by releasing cash they had set aside for loans that might not be repaid. 

About the author

Kate Davidson is a regular contributor to Marketplace.

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