“Turbulent” is probably the safest way to describe the interest rate landscape for financial institutions in 2019. Opinions about upcoming rate movements have taken a rollercoaster ride over the past several months. This is based on comments from Federal Reserve Chairman Jerome Powell, and the Federal Open Market Committee meeting again this week. We will likely see a decline in benchmark interest rates sooner rather than later. The exact extent is unclear—but most estimates are around 25 bps, up to an extreme of 50 bps. So, what does this mean for financial institutions?
The impact of lower rates on FIs
The most immediate impact will be for banks that have a significant portfolio of variable rate (prime-based) loans. These institutions are anticipating consumer pressure to offer rate concessions on fixed-rate loans. If not, the threat of an abundance of other institutions and non-traditional lending sources is growing. In the worst-case scenario, banks may see an exodus of customers seeking a lender that can offer them a lower rate.
On the deposit side, smaller banks may be less likely to lower deposit rates, with liquidity a major concern. Despite customer pressure, many banks were slow to raise deposit rates and would be reluctant to do so now. They cannot afford to lose deposits and will not be inclined to lower deposit rates to offset the rate decrease.
Who will take the hit?
Rate cuts are going to hit all banks. But big banks can go to the bond market and institutional lenders to borrow inexpensively. Small banks and credit unions don’t have that luxury. Smaller institutions must rely on deposits or borrowings from the Federal Home Loan Bank, but this is limited by the size of the institution. The bottom line is that the market for good loans and for the retention of deposits is competitive. Any rate decrease will make the situation even more complicated for small financial institutions.
Some banks are beginning to hedge against rate decreases. But there are risks inherent in this strategy. While hedging may mitigate the impact of rate declines, this typically requires a sacrifice in overall earnings.
How can we help?
Banker’s Dashboard is a powerful tool that allows bankers to track their Net Interest Margin over time—in real time—using margin reports.
The Forecasting module provides a streamlined way for users to run complex “what-if” scenarios to account for any interest rate adjustments. And, when assessing deposit-side liabilities–if your bank intends to absorb some of the rate cut, Forecasts can give crucial insight into the impact of that too.
Dashboard also houses a CD Repricing module. This tool will provide visibility into what’s maturing at any time, and allows you to better forecast the impact of rate changes.
If you’re currently using Dashboard and wondering how to harness the reporting and analytics to help guide your institution through the storm—we’re on hand to help. or, if you’re interested in a tool that can provide this level of in-depth insight on-the-fly—contact us today. The Banker’s Dashboard team includes seasoned CPAs and even a former bank CFO. Deluxe can help your institution leverage the latest technology to optimize your bank’s performance, whatever the weather.