Rates spreads tightening... Bad for US Banks

What we do know is the difference between short and long rates - the "spread" in Wall Street parlance - is now less than one percentage point, down from around three points a year ago.

This is more than mathematical trivia. To bankers in particular, it can be the difference between profit and loss.

Bankers, after all, make money by borrowing "short" from their depositors, while lending "long" to businesses, home buyers and others.

A healthy spread between short and long interest rates traditionally means banks can earn a nice income - enough to give freebies to depositors, take big clients to Phillies games, and still give the shareholders a decent return.

But when interest-rate spreads narrow, bankers have to scramble. Many turn tight-fisted, making loans harder to get. Others can become desperate, betting on risky ventures that can come back to haunt them.

Either way, the result can mean trouble for the economy as a whole. If firms cannot get loans, they won't expand, and more will fail. If banks themselves fail, shareholders, depositors and even taxpayers can be hurt.

That's what happened in the late 1980s; the savings-and-loan debacle took years to resolve and cost many billions.

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