In previous articles, I’ve written about Fed rate changes from the perspective of the borrower, the supply side. I’ve written that a lowering of Fed short-term money, usually 30-day money, may not correlate to a lowering in interest rates on long-term money (5-, 10-, 15-, or 20-year).
There are two general reasons why. One is the Fed tends to signal its intent far enough in advance that lenders price in that new rate for subsequent loans. Another is due to a lender’s cost of business. Let’s say a lender requires a spread in its aircraft loan portfolio of 200 to 235 basis points above its cost of money to stay afloat. If its cost of money is 2 percent, then its average lending rate will need to be 4.35 percent. A Fed rate lower than that will simply not work.
Does that mean lenders miss out on lending opportunities? It depends. If a finance company is in the market for making loans, then yes. But if it’s not, then no. The “no” depends upon the finance company’s appetite, or demand, for loan-making.
We think that banks are always in the mood to make a loan. After all, loans are a bank’s assets, and who wouldn’t want more assets, right? But there are unusual times, there are environments and there are situations when a bank has little or no appetite to assume more loans. This is one of those times.
The current pandemic and its deleterious effect on both the global economy and on Wall Street have banks concerned about what 2021 will look like. Couple that with the fact that the current low interest rate atmosphere has many banks already booked solid on loans as well as being at the lowest end of their profit margins on those loans, and we find ourselves in a unique moment where banks are willing to avoid the risk inherent in making aircraft loans.AOPA
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