Despite lackluster performance of the US economy, commercial banks are raking profits. After the recession of early 1990s, hundreds of banks were ruined. It all started with the stock market bubble, followed by a mild recession and then sluggish growth. On the other hand, the recent adverse developments of corporate scandals, combined with heightened geopolitical tensions, were reflected in a precipitous decline in capital expenditures. These developments also put considerable downward pressure on inflation.

So, what are the factors attributed for their vibrant performance? US banks at present are recalling past losses in Latin America on property and oil. An important contributor to last year's bank profitability was the decline to extraordinarily low levels of market interest rates. Lower interest rates have made cheaper to service and kept many households and small firms from default, which helped the banks to recover their loans. With the cost of holding liquid deposits low and with weak equity markets clearly adding to the attractiveness of liquidity, banks become the recipients of large inflows of inexpensive savings deposits that helped to reduce interest expense and boost net interest margins.

However, the Bank for International Settlements (BIS), offers some insights. Its latest annual report (June 30, 2003) reveals that the end of an "investment-driven boom" caused the present slowdown. BIS further says that the structural factors have also played their part. The gradual shift from bank lending to the capital markets has also helped banks to carry less credit risk. Further the developments of new financial instruments i.e., credit derivatives have also helped to shift risk from the banks to insurance companies, pension fund and others.

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