Banking is an easy business… most of the time.

Banks take in customer deposits, pay some small amount of interest on the money, and then loan the money to other customers at a higher rate. The difference in rates is called the “spread.” And the spread is profit for the bank.

It’s an easy business when the spread is wide, like it was for most of the past 15 years. It gets even easier when banks can borrow money from the Fed for nothing, and then lend that money back to the U.S. government – which has the power to print money, thereby making it a risk-free loan.

Over the past years, it’s been good to be a bank. But those days are gone.

It’s no longer possible for banks to borrow from the Fed at 0% interest and then lend the money to the U.S. government, by buying 10-year Treasury notes and 30-year Treasury bonds for a positive spread.

Last October, the yield curve inverted – meaning short-term interest rates popped above long-term interest rates. The “spread” is now negative – more negative, in fact, than at any time over the past 30 years.

Banks can still borrow from the Fed. But now it costs them 4.75%. And the best yield the banks can get right now on a 10-year T-note is about 3.75%.

Nobody is making any money right now with a negative spread. So, the banks must rely on other business activities to profit.

For example, banks can lend money for mortgages and refinancing activity. But there’s not as much of that happening these days.

Banks can profit from credit card fees and charges. But while that activity is higher, delinquency rates are higher too.

Banks can profit by consulting on and financing new corporate activity such as reorganizations, initial public offerings, and mergers and acquisitions. Here again, though, there’s not as much of that happening these days.

Banks can also try to profit by offering asset management and trading services. But that activity is way down too, thanks in part to a year-long bear market in stocks.

So, it appears that this is one of those rare times when it’s hard to be a bank. And the stock market is finally starting to realize that.

Over the weekend, the Fed announced several measures to help build confidence in the banking sector and prevent a large-scale “run on the banks.” Those measures may help to stop the bleeding for now.

But although valuations have come down a bit over the past year, most banks are still trading well above their historic book-value multiples.

There are longer-term, systemic problems with the banking business that’ll likely only be cleared up through time.

So, while it may be tempting to jump in and start buying the bank stocks right now, they likely have lower to go.

Best regards and good trading,

Jeff Clark

Source: Jeff Clark Trader