Are banks really making less profit when interest rates are low?
profit has nothing to do with the level of interest rates. Is this correct? In theory, yes. The difference that you're getting at is called net interest margin. As long as this stays constant, so does the bank's profit. According to this article: As long as the interest rate charged on loans doesn't decline faster than the interest rate received on deposit accounts, banks can continue to operate normally or even reduce their bad loan exposure by offering lower lending rates to already-proven borrowers. So banks may be able to acquire the same net interest margin with lower risk. However the article also mentions new research from a federal agency: Their findings show that net interest margins (NIMs) get worse during low-rate environments, defined as any time when a country's three-month sovereign bond yield is less than 1.25%. So in theory banks should remain profitable when interest rates are low, but this may not actually be the case. I've read this claim many times in the news: banks are making less profit from the lending business when interest rates are historically low. The issue with most loans is they can be satisfied at any time.  When you have falling interest rates it means most of the banks loans are refinanced from nice high rates to current market low interest rates which can significantly reduce the expected return on past loans.  The bank gets the money back when it wants it the least because it can only re-lend the money at the current market (lower) interest rates.  When interest rates are increasing refinance and early repayment activity reduces significantly. It's important to look at the loan from the point of view of the bank, a bank must first issue out the entire principal amount.  On a 60 month loan the lender has not received payments sufficient to satisfy the principal until around 50th or 55th month depending on the interest rate.  If the bank receives payment of the outstanding amount on month 30 the expected return on that loan is reduced significantly. Consider a $10,000, 60 month loan at 5% apr.  The bank is expected to receive $11,322 in total for interest income of $1,322.  If the loan is repaid on month 30, the total interest is about $972.  That's a 26% reduction of expected interest income, and the money received can only be re-lent for yet a lower interest rate. Add to this the tricky accounting of holding a loan, which is really a discounted bond, which is an asset, on the books and profitability of lending while interest rates are falling gets really funky. And this doesn't even examine default risk/cost. "Banks make less profit when ""long"" rates are low compared to ""short"" rates. Banks lend for long term purposes like five year business loans or 30 year mortgages. They get their funds from (mostly) ""short term"" deposits, which can be emptied in days. Banks make money on the difference between 5 and 30 year rates, and short term rates. It is the difference, and not the absolute level of rates, that determines their profitability. A bank that pays 1% on CDs, and lends at 3% will make money. During the 1970s, short rates kept rising,and banks were stuck with 30 year loans at 7% from the early part of the decade, when short rates rose to double digits around 1980, and they lost money."
What you say about monetary velocity is true, but I don't think its the whole story. Banks also create money by lending out their deposits: if I put $1000 in my account, and the bank lends out $500 of it, I still have my $1000 on deposit but someone else is also spending an extra $500. If the banks are lending less then this effect is reduced and the volume of money reduces as well as its velocity. ChelseaFC rocked number 2, so before I try to answer number 1, I'll just mention that academics generally ignored negative *real* interest rates, and have always admitted that negative *nominal* rates were perfectly possible.  There's nothing in his explanation that I think is controversial at this point though.  As for number 1, a drop in a company's share price affects the company's ability to raise cash in the present and future.  In a closely related issue, that drop can affect the company's ability to compensate its employees through options and restricted stock grants.  In the long run (and I suspect you already know this), and drop in the share price affects the shareholders' wealth, and can lead them to demand that changes be made to be firm's operations (usually, changes made to who's running the firm).  If a firm doesn't need more financing, and it doesn't pay any employees with stock or derivatives on its stock, then changes to its stock price won't affect the firm's operations in the slightest.  Naturally, this assuming that the change in stock prices isn't indicative of changes to the economy, but that's a causal relationship in the other direction (the stock price reflects changes in operations, not the other way around). "With (1), it's rather confusing as to where ""interest"" refers to what you're paying and where it refers to what you're being paid, and it's confusing what you expect the numbers to work out to be. If you have to pay normal interest on top of sharing the interest you receive, then you're losing money. If the lending bank is receiving less interest than the going market rate, then they're losing money. If the bank you've deposited the money with is paying more than the going market rate, they're losing money. I don't see how you imagine a scenario where someone isn't losing money. For (2) and (3), you're buying stocks on margin, which certainly is something that happens, but you'll have to get an account that is specifically for margin trading. It's a specific type of credit with specific rules, and you if you want to engage in this sort of trading, you should go through established channels rather than trying to convert a regular loan into margin trading. If you get a personal loan that isn't specifically for margin trading, and buy stocks with the money, and the stocks tank, you can be in serious trouble. (If you do it through margin trading, it's still very risky, but not nearly as risky as trying to game the system. In some cases, doing this makes you not only civilly but criminally liable.) The lending bank absolutely can lose if your stocks tank, since then there will be nothing backing up the loan." "Can it be so that these low-interest rates cause investors to take greater risk to get a decent return?  With interest rates being as low as they are, there is little to no risk in banking; especially after Dodd-Frank. ""Risk"" is just a fancy word for ""Will I make money in the near/ long future."" No one knows what the actual risk is (unless you can see into the future.) But there are ways to mitigate it. So, arguably, the best way to make money is the stock market, not in banking.  There is a great misallocation of resources which at some point will show itself and cause tremendous losses, even maybe cause a new financial crisis? A financial crisis is backed on a believed-to-be strong investment that goes belly-up.  ""Tremendous Losses"" is a rather grand term with no merit. Banks are not purposely keeping interest rates low to cause a financial crisis.  As the central banks have kept interest rates extremely low for a decade, even negative, this affects how much we save and borrow. The biggest point here is to know one thing: bonds. Bonds affect all things from municipalities, construction, to pensions. If interest rates increased currently, the current rate of bonds would drop vastly and actually cause a financial crisis (in the U.S.) due to millions of older persons relying on bonds as sources of income." Since 1971, mortgage interest rates have never been more than .25% below current rates (3.6%).  Even restricting just to the last four years, rates have been as much as .89% higher.  Overall, we're much closer to the record low interest rate than any type of high.  We're currently at a three-year low.   Yes, we should expect interest rates to go up.  Eventually.  Maybe when that happens, bonds will fall.  It hasn't happened yet though.  In fact, there remain significant worries that the Fed has been overly aggressive in raising rates (as it was around 2008).  The Brexit side effects seem to be leaning towards an easing in monetary policy rather than a tightening. What the comments above say is true, but one more thing is there. FD rates are directly proportional to loan rates. However, banks make money because loan rates will always be higher than FD rates. What is your investment goal?  Many investors buy for the long haul, not short-term gain.  If you're looking for long-term gain then daily fluctuations should be of no concern to you.  If you want to day-trade and time the market (buy low and sell high with a short holding period) then yes less volatile stock can be less profitable, but they also carry less risk.  In that case, though, transaction fees have more of an impact, and you usually have to trade in larger quantities to reduce the impact of transaction fees. "(Real) interest rates are so low because governments want people to use their money to improve the economy by spending or investing rather than saving. Their idea is that by consuming or investing you will help to create jobs that will employ people who will spend or invest their pay, and so on. If you want to keep this money for the future you don't want to spend it and interest rates make saving unrewarding therefore you ought to invest. That was the why, now the how. Inflation protected securities, mentioned in another answer, are the least risk way to do this. These are government guaranteed and very unlikely to default. On the other hand deflation will cause bigger problems for you and the returns will be pitiful compared with historical interest rates. So what else can be done? Investing in companies is one way of improving returns but risk starts to increase so you need to decide what risk profile is right for you.  Investing in companies does not mean having to put money into the stock market either directly or indirectly (through funds) although index tracker funds have good returns and low risk. The corporate bond market is lower risk for a lesser reward than the stock market but with better returns than current interest rates. Investment grade bonds are very low risk, especially in the current economic climate and there are exchange traded funds (ETFs) to diversify more risk away. Since you don't mention willingness to take risk or the kind of amounts that you have to save I've tried to give some low risk options beyond ""buy something inflation linked"" but you need to take care to understand the risks  of any product you buy or use, be they a bank account, TIPS, bond investments or whatever. Avoid anything that you don't fully understand." "QUICK ANSWER When it comes to fixed income assets, whether rental real estate or government bonds, it's unusual for highly-leveraged assets to yield less than the same asset unleveraged or lowly-leveraged.  This is especially so in countries where interest costs are tax deductible. If we exclude capital losses (i.e. the property sells in future at a price less than it was purchased) or net rental income that doesn't keep up with maintenance, regulatory, taxation, inflation and / or other costs, there is one primary scenario where higher leverage results in lower yields compared to lower leverage, even if rental income keeps up with non-funding costs.  This occurs when variable rate financing is used and rates substantially increase. EXPLANATION Borrowers and lenders in different countries have different mortgage rate customs.  Some are more likely to have long-term fixed rates; some prefer variable rates; and others are a hybrid, i.e. fixed for a few years and then become variable. If variable rates are used for a mortgage and the reference rates increase substantially, as they did in the US during the 1970s, the borrower can easily become ""upside-down,"" i.e. owe more on the mortgage than the property is then worth, and have mortgage service costs that exceed the net rental income.  Some of those costs aren't easy to pass along to renters, even when there are periodic lease renewals or base rent increases referencing inflation rates.  Central banks set policies for what would be the lowest short-term rates in a country that has such a bank.  Private sector rates are established broadly by supply and demand for credit and can thus diverge markedly from central bank rates. Over time, the higher finance-carrying-cost-to-net-rental-income ratio should abate as (1) rental market prices change to reflect the costs and (2) the landlord can reinvest his net rental income at a higher rate.  In the short-term though, this can result in the landlord having to ""eat"" the costs making his yield on his leveraged fixed income asset less than what he would have without leverage, even if the property was later sold at same price regardless of financing method. ========== Interestingly, and on the flip side, this is one of the quirks in finance where an accounting liability can become, at least in part, an economic asset.  If a landlord borrows at a high loan-to-value ratio for a fixed interest rate for the life of the mortgage and rates, variable and fixed, were to increase substantially, the difference between his original rate and the present rates accrues to him. If he's able to sell the property with the loan attached (which is not uncommon for commercial, industrial and sometimes municipal real estate), the buyer will be assuming a liability with a lower carrying cost than his present alternatives and will hence pay a higher price for the property than if it were unleveraged. With long-term rates in many economically advanced countries at historic lows, if a borrower today were to take a long-term fixed rate loan and rates shortly after increased substantially, he may have an instant profit in this scenario even if his property hasn't increased in value." "Good news, but not surprising. The banks have largely done well over the last handful of years in terms of having sufficient capital to be able to withstand the Fed's downside models. The issues largely arise in regards to current dividend and share buy-back plans which the models assume are constant despite them being entirely discretionary. As a result it isn't uncommon for banks to have ""failed"" in the past which simply required a scaling down of dividends to solve." I'm not too familiar with the Bank of England's objectives, but it seems similar to the FED's QE program. The interest rate the BOE sets, similar to the FED rate, affects mainly the short term (the left side) of the [interest rate curve](http://www.bankofengland.co.uk/statistics/pages/yieldcurve/default.aspx). However, in order to bring down intermediate and long term rates, central banks will buy intermediate and long dated government and corporate bonds. The government's added demand will drive those bond prices up, which will drive yields down.  But like I said, I'm not too familiar with the BOE's bond purchasing program, so I could be way off base here. It depends on your bank's terms (which may in turn be influenced by laws and regulations), but most banks calculate interest on a per-day basis, so if you leave the money in the account for more than a day, it will generate interest. However, it will most likely be so little that you could make more money doing any kind of paid work in the time it took you to write this question... Generally a credit union will tend to have lower rates, since they are owned by the members, and not having to make a profit for some rich bankers or a bunch of shareholders.  OTOH their funds are often more limited than a bank, and they may be pickier about who they loan to. still that's just 'generally', it always pays to shop around Keep in mind there are a couple of points to ponder here: Rates are really low. With rates being so low, unless there is deflation, it is pretty easy to see even moderate inflation of 1-2% being enough to eat the yield completely which would be why the returns are negative. Inflation is still relatively contained. With inflation low, there is no reason for the central banks to raise rates which would give new bonds a better rate. Thus, this changes in CPI are still in the range where central banks want to be stimulative with their policy which means rates are low which if lower than inflation rates would give a negative real return which would be seen as a way to trigger more spending since putting the money into treasury debt will lose money to inflation in terms of purchasing power. A good question to ponder is has this happened before in the history of the world and what could we learn from that point in time. The idea for investors would be to find alternative holdings for their cash and bonds if they want to beat inflation though there are some inflation-indexed bonds that aren't likely appearing in the chart that could also be something to add to the picture here. I think it's only a choice of terminology.  Typically with a money market account has check-writing privileges whereas a savings account does not. In terms of rates, this blog has a good list of high interest yield savings accounts. http://www.hustlermoneyblog.com/best-bank-rates/ Disclosure: I am not affiliated with this blog.  I just think it is a good resource to compare the rates across different banks.