US bank earnings - pros and cons The pros and cons of higher interest rates for US banks have become a topic of hot debate. Rising rates are typically a boon for banks because they increase the amount that they can earn on their loans. They often also accompany an improving economy, raising the potential volumes. But in the run-up to second-quarter earnings, which kick off on Friday, concern has arisen about the effect that rising rates will have on banks" securities holdings. For now at least, most investors seem to fall into the pro camp. But they would be advised to remember that there is more to banking than interest rates and securities holdings. Still, even bulls have to admit that plenty of good news is already priced in. The KBW Bank index, as well as regional banks such as BB&T and M&T, have marched to new post-crisis highs since Ben Bernanke began in May to discuss the central bank tapering its bond purchases should the economy hold up. So far this year banks are up 26 per cent, beating the S&P 500 by about 10 percentage points. But valuations have crept higher, too. Bank of America, for example, is trading on about 15 times forward earnings. Price to tangible book values are mostly above unity. Whether these valuations are tempting or now stretched depends on many competing forces. For large mortgage lenders such as Wells Fargo, say, higher rates mean lower refinancing activity - but they also raise the value of mortgage servicing rights. At investment banks, debt underwriting activity was initially strong, but has dried up toward the end of the quarter. Trading volumes were likely fine year over year, although there was probably a drag from wider credit spreads and commodities. For now investors are sanguine. That is probably fair. Valuations are not insane and higher rates and a better US economy have historically been good for banking.