Cutting to the Quick

Still, while lower rates are always a positive for banks, the effects of the Fed’s cuts may not prompt an immediate rebound in profits at many banks. Among other things, the nation’s lenders have so thoroughly depleted their capital that they may not be in a position to take advantage of the profit opportunity that the rate cuts offer. Analysts writing in the UBS Mortgage Strategist made a cogent argument for this last week.

For example, the analysts contend that right now many banks cannot take advantage of the lower cost of money to invest in higher-yielding securities. This kind of transaction is known as the carry trade, a reference to the positive interest or “carry” earned on the investments; such trades have been huge moneymakers for financial institutions in recent years and could help their profit pictures now.