Good and Exciting Times for Banks

The two times when it’s good to be a modern universal bank are:

There is a rough negative correlation between these things. Often when the economy is good and improving, financial assets move up in a steady and boring way. Banks make money because their loans get paid off, investors want to buy assets and companies raise money to pursue opportunities, but there is a lot of competition and prices are high, so it is hard to make giant windfalls by buying low and selling high. When markets are wild and volatile, banks can make money in trading; volatility makes their trading services — providing liquidity and hedging risk — valuable, and creates opportunities to buy assets cheap from distressed counterparties. But when things are wild and volatile, your loan book gets worse: Borrowers default, and you worry that more of them will default and write down your loans.