U.S. banks received a windfall of $56.2 billion over a two-year period as borrowing costs declined to almost zero and interest rates paid to depositors fell to their lowest level since 2003.

The increase in net interest income at Bank of America Corp., Citigroup Inc. and other banks came even as lending revenue, an indicator of loan volume, dropped by 23 percent in the two years ending Sept. 30, 2009, according to data compiled by SNL Financial, a bank-research firm.

Net interest income is the difference between what banks pay to borrow money and what they get back when they lend or invest it, before loan losses or taxes. The increase, reported by Bloomberg BusinessWeek in its Feb. 15 issue, is a hidden subsidy at the expense of consumers, according to Joseph R. Mason, a finance professor at Louisiana State University in Baton Rouge.

"We are all funding the bailouts, whether we want to or not, both as taxpayers and depositors," Mason said.

The U.S. government spent $320 billion to rescue banks with its Troubled Asset Relief Program, $167 billion of which has been paid back, according to a Jan. 30 report by the TARP special inspector general.

SNL, based in Charlottesville, Virginia, made the calculation at Bloomberg's request by comparing the amount of net interest income earned by the nation's more than 8,000 banks in the 12 months before the credit crisis with what they made after Sept. 30, 2007. Banks saw their cost of money fall after the Federal Reserve began ratcheting down its interest-rate target for overnight loans between banks to zero to 0.25 percent in December 2008 from 5.25 percent in September 2007.

Eoin Treacy's view An inverted yield curve can be described as a situation where the yield on the 2yr is higher than the 10yr. This has been a reliable lead indicator for recessions in the USA over the last number of decades and was last evident through 2006 and the early part of 2007. Such conditions are generally indicative of tighter monetary conditions and a corresponding decline in the demand for short-term paper.

Right now, the opposite situation is evident, monetary conditions are at, or close to, historic highs in a large number of OECD countries. Central banks are beginning to talk about how they will remove this stimulus, whether by beginning to raise interest rates or exit quantitative easing. However, this has yet to have a material impact on the steepness of the yield curve.

We have often referred to banks being bailed out via the yield curve (last mentioned in Comment of the Day on October 28th). All over the world, rates were cut aggressively, cash was made available at the discount window to problem institutions and stimulus packages were introduced. Every opportunity has being made available to banks so that they can trade their way out of their problems. Some of the larger investment banks have posted impressive profits, supported by their trading activities. Deutsche Bank's earnings announcement today is one such example. However, with the expectation that such easy monetary conditions are not going to last indefinitely the banking sector may already be encountering a headwind.

A high degree of commonality is evident in comparisons of 10yr-2yr spreads with USA, UK, Euro, Swiss and Canadian spreads sharing a similar pattern over the last 20 years. When we compare the lax conditions in these countries with those of comparatively stronger economies the differences are obvious.

The Australian yield curve steepened considerably from 2008 but did not reach the 1992 heights and appears to have topped out. We do not have as much back history available for Indian and Chinese spreads but both have contracted violently over the last month which suggests that the period of extraordinarily lax monetary conditions has ended in these countries.

The removal of stimulus in comparatively strong economies is to be welcomed if one takes a medium-term view because it indicates confidence among policy makers that respective economies can prosper without it. However in the short-term, this action may offer a headwind to financial markets, particularly sectors most dependent on the availability of credit. (Also see the piece in yesterday's Comment of the Day on Chinese property.)

On the one hand we can look at the continued steep yield curves in the OECD and conclude that the recovery in the respective economies remains so uncertain that these conditions are needed. On the other we know that the tight conditions one would associate with a stiff headwind for a bull market are not evident. The divergence between relatively healthy commodity related and Asian emerging market countries and relatively ill economies of the OECD further emphasizes the continued allure of the former for the long term.