Earnings Send Disappointing Signals for Bank Rates

Indications from second quarter earnings releases are that banks are continuing to suffer from bad loans tied to the real estate sector. That's bad for banks, and in this case, what's bad for the banks is also bad for bank customers.

Money market rates, CD rates, and savings account rates continue to bump along at extremely low levels. If bank earnings continue to be sluggish, it gives banks little incentive to start boosting bank rates. More specifically, if lending continues to be a troubled business for banks, there won't be any rush to offer higher bank rates to attract the deposits that fund new loans.

The fact that banks' earnings woes are still being tied to the real estate slump may carry even more ominous implications than the fact that bank rates may stay low for a while. There has long been a concern in the marketplace that real estate may be in for another leg downward, especially now that homebuyer incentives have expired. If this happens, the question becomes one of how profoundly those troubles will shake the stability of the banking system.

As of yet, there has been no repeat of the systemic problems which threatened the banking industry in 2008. In fact, an optimist's view of this earnings season could be that it is a form of progress when earnings reports are disappointing because growth is sluggish, as opposed to earnings representing severe losses. Still, it looks like it will still be a while before the banking industry can breathe a sigh of relief -- and an equally long while before bank rates start heading upward.

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