Life has been good for American banks. Low interest rates, a roaring mortgage market and borrowing by the spendthrift American consumer have sent money washing into their coffers. According to the Federal Deposit Insurance Corporation (FDIC), one of America's many financial regulators, banks chalked up $135 billion in profits last year, their fifth consecutive year of record earnings-even though the Federal Reserve has raised interest rates 14 times since mid-2004. But there are signs that the best days are gone. Despite the profits, last year also saw banks' return on equity drop to 12.5% from a peak of 15% in 2003, according to FDIC figures (see chart 1). Are rising interest rates finally taking a toll?
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