Why do lending teams prefer higher interest rates?
Perhaps it is an obvious question but I don't get why people working in lending and origination prefer higher interest rates. Obviously they would receive higher interest payments but in the end it is all about spreads to risk free rates which remain stable regardless of interest rate fluctuations.
Good question, you're going down the right paths. Banks profit (in a traditional sense) based on their net interest margin. When rates are high, the spread between their funding costs and interest rate revenue is higher. Generally, bank borrow short and lend long. Short term borrowing is lower cost and they can charge more for long term lending. You're probably thinking that the interest rate level doesn't really matter, all that matters is the spread they can charge. That is correct, but only to a degree. In fact, spreads are generally HIGHER when interest rate levels are high as well. Spreads don't "remain stable regardless of interest rate fluctuations." Spreads on things like commercial real estate loans and non prime corporate lending do get fatter when rates go up.
Additionally, when interest rates are high, the spread between risk free rate and interest paid on deposits is larger. Banks pay a rate on demand deposits (available for immediate withdrawal) which is lower than the risk free rate. Often, they pay zero on deposits even when the risk free rate is at 1% or higher. This puts them in a position to earn an even larger spread when rates are high and impacts their net interest margin. Though banks aren't entirely funded off of deposits, this is a fairly big thing for them. This means that even if the spread between risk free rate and the rate they charge stays the same, their net interest margin will grow when interest rates grow because their deposits lag the risk free rate.
Other points the "risk free rate" the spread is based off could be a longer dated rate than their funding. If they are borrowing a decent amount of money at LIBOR 1-week, but lending at 30-day LIBOR (common for RE), a rising rate environment will further benefit them (despite the spread perhaps staying the same).
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