Will rising interest rates ultimately hurt profits?

Executive Summary

A decade after the 2008 financial crisis, U.S. banks are at an inflection point. They are posting record profits thanks to rising interest rates, reduced regulation and a lower federal tax bill. Nevertheless, financial institution share prices have been laggards because of investor concerns that the rising interest rates will lead to increased costs as banks compete for customers seeking higher returns on deposits. At the same time, higher interest rates are dissuading some borrowers from taking out new mortgages and other loans. Nonbank lenders are also winning away customers for mortgages and business loans from traditional banks. Eight years after adoption of the Dodd-Frank financial regulation law, which was aimed at preventing bank failures that require taxpayer bailouts, Congress and the Trump administration have begun rolling back some of the restrictions.

Key takeaways include:

  • The banking industry’s aggregate net income of $62 billion in the third quarter was $14 billion higher than in the same period of 2017.

  • The nation’s largest banks have grown substantially in the past decade, despite concerns during the financial crisis about large institutions creating a systemic risk to the entire economy.

  • A wave of bank consolidations swept the industry following the crisis, as smaller banks found it increasingly difficult to compete with their larger rivals.

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Resources for Further Study



Bernanke, Ben S., “The Courage to Act: A Memoir of a Crisis and Its Aftermath,” Norton, 2015. The chairman of the Federal Reserve during the financial crisis explains his moves to provide easily available credit at a time when the international monetary system was on the verge of freezing up.

Geithner, Timothy, “Stress Test: Reflections on Financial Crises,” Crown, 2014. The Treasury secretary under President Barack Obama offers a close-up history of key points in the financial crisis.

Paulson, Henry M. Jr., “On the Brink: Inside the Race To Stop the Collapse of the Global Financial System,” Business Plus, 2010. The former Goldman Sachs CEO and Treasury secretary under President George W, Bush, who played a central role in the early efforts to stop the financial crisis, explains the decision to allow Lehman Brothers to fail.

Sorkin, Andrew Ross, “Too Big to Fail,” Penguin Books, updated edition, 2010. A New York Times journalist’s history of the financial crisis with unparalleled access to many of the key players.


Bernanke, Ben S., Timothy F. Geithner and Henry M. Paulson Jr., “What We Need to Fight the Next Financial Crisis,” The New York Times, Sept. 7, 2018, http://tinyurl.com/y8ckjczz. The key government officials in containing the financial crisis prescribe steps to avoid a repetition.

Hoban, Brennan, “The mortgage market risk no one’s talking about, plus a proposal to redesign the system,” Brookings Institution, March 8, 2018, http://tinyurl.com/ybxmjo56. The growth of nonbank mortgage lending creates a risk to the financial system that could be as great as the peril posed by subprime mortgages a decade ago, three experts argue.

Phillips, Matt, “Wall Street Loves These Risky Loans. The Rest of Us Should Be Wary,” The New York Times, Oct. 19, 2018, http://tinyurl.com/y75t8gk6. A journalist provides an overview of collateralized loan obligations, a type of security that some worry may be sowing the seeds of the next financial crisis.

Reports and Studies

“Basel Committee on Banking Supervision: High-level summary of Basel III reforms,” Bank for International Settlements, December 2017, http://tinyurl.com/y9drkse8. The actions of a group of central bankers who adopted stricter capital requirements for all large banks considered a potential threat to the international financial system.

“Dodd-Frank Wall Street Reform and Consumer Protection Act,” Government Printing Office, July 21, 2010, http://tinyurl.com/yc6bf6fq. The complete text of the Dodd-Frank legislation.

“Economic Growth, Regulatory Relief, and Consumer Protection Act,” Congress.gov, 2018, http://tinyurl.com/y9putk6k. The text of the legislation rolling back parts of the Dodd-Frank law.

“A Financial System That Creates Economic Opportunities,” U.S. Department of the Treasury, June 2017, http://tinyurl.com/y8h8ztsj. The Treasury’s detailed response to President Trump’s call for changes in financial regulation.

“Presidential Executive Order on Core Principles for Regulating the United States Financial System,” The White House, Feb. 3, 2017, http://tinyurl.com/yay8kf9s. President Trump’s executive order calling for sweeping changes in the regulations governing financial institutions in the country.

The Next Step


Eavis, Peter, “The Fed Is Relaxing Banking Rules. What Goodies Are the Banks Getting?” The New York Times, Oct. 31, 2018, https://tinyurl.com/y9v37xva. The Federal Reserve has proposed easing restrictions on banks with $100 billion to $700 billion in assets, including relaxing the liquidity coverage ratio rule, which requires banks to maintain a supply of highly marketable assets to help them weather a crisis.

Imbert, Fred, “Trump and Republicans have ‘completely neglected’ oversight responsibilities, Rep Maxine Waters says,” CNBC, Nov. 27, 2018, https://tinyurl.com/y9u5veq8. Rep. Maxine Waters, a California Democrat who will become head of the House Financial Services Committee in January, has vowed to roll back banking deregulation actions taken by the Trump administration and the Republican-controlled Congress.

Sherman, Erik, “Scaling back Dodd-Frank is just the beginning of Trump’s run on deregulation,” NBC News, May 24, 2018, https://tinyurl.com/y9z3m6nz. Legislation that eased parts of the Dodd-Frank bank regulation law did not remove core provisions such as stricter regulatory scrutiny and greater financial requirements.

Nonbank Mortgage Loans

“Non-bank firms are now big players in America’s mortgage market,” The Economist, Nov. 29, 2018, https://tinyurl.com/y7t3jcz3. Nonbanks are gaining more of the U.S. mortgage market, but they lack transparency about their finances and their ability to withstand a housing market crisis.

Kim, You Suk, et al., “Mapping the boom in nonbank mortgage lending – and understanding the risks,” Brookings Institution, Sept. 10, 2018, https://tinyurl.com/yaxhr7sz. Nonbank mortgage lenders are a major risk to the economy because they depend on short-term credit, riskier loans and mortgage refinancing, five experts contend in a paper.

Rexrode, Christina, “Retreat of Smaller Lenders Adds to Pressure on Housing,” The Wall Street Journal, updated Nov. 22, 2018, https://tinyurl.com/yazmaxeh. Despite the recent rapid growth of nonbank mortgage lenders, smaller institutions are struggling because of rising interest rates and the slowdown of the housing industry this year.


399 Park Ave., New York, NY 10043
A leading financial institution that received the largest U.S. government bailout of any bank during the 2008 crisis.

Federal Deposit Insurance Corp.
550 17th St., N.W., Washington, DC 20429
Federal agency that insures bank deposits and provides oversight of U.S. banks.

Federal Reserve
20th Street and Constitution Avenue, N.W., Washington, DC 20551
Central bank that sets benchmark interest rate and regulates U.S. banking system.

JPMorgan Chase
270 Park Ave., New York, NY 10017
The largest bank in the United States by assets.

Treasury Secretary Steven Mnuchin
1500 Pennsylvania Ave., N.W., Washington, DC 20220
Head of Treasury Department who is leading the Trump administration effort to overhaul bank regulations.

U.S. House Financial Services Committee
2129 Rayburn House Office Building, Washington, DC 20515
House panel that is responsible for oversight of financial institutions and regulation.

U.S. Senate Committee on Banking, Housing and Urban Affairs
534 Dirksen Senate Office Building, Washington, DC 20510
Senate committee with oversight of financial institutions and regulation.

DOI: 10.1177/237455680436.n1