Banking's Profitable Decade: Interest Rate's Role

Banking's Profitable Decade: Interest Rate's Role



McKinsey recently reported that banks are seeing their biggest profits in ten years. This boom in profits, they claim, is largely thanks to the increase in interest rates. This increase enabled banks to earn more from loans and mortgages, bumping up the global banking profits by about $280 billion.



To break it down: In the US, there was a significant 500-basis-point jump in interest rates. This change meant banks could improve their net interest margins, leading to the banking sector's profits rising to $280 billion in 2022. This improvement also increased the return on equity (ROE) to 12% in 2022 and it's expected to reach 13% in 2023. To give a comparison, the average ROE since 2010 has been only 9%.



Looking at the numbers, McKinsey pointed out that the banking sector's net earnings surged from $1 trillion in 2021 to $1.3


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