If there is one thing that most community bankers, analysts, and regulators have been in agreement with in recent years, it is the consistent projection of imminent rising rates. Well, we know rising rates are finally a reality as the Federal Reserve has raised the Fed Funds rate twice since the end of 2016 and projects an additional five increases over the next 21 months. This has been positive news for many bankers.
Pace of Deposit Rate Increases Lags Fed Fund Rate Increases
As the Fed Funds rate rose by 422 basis points from the summer of 2004 to the fall of 2006, the most aggressively priced banks saw their cost of deposits increase by 329 basis points. By contrast, top performing banks saw an increase of only 140 basis points, capturing a funding advantage of 45 basis points per every 100 basis-point increase in the Fed Funds rate.
Consumer Behavior Continue to Shift Online
Source: Federal Reserve
Liquidity Coverage Ratio Pressures Still Subdued
However, these pressures have not been borne out yet on community banks. Since LCR’s full implementation in early 2016, community banks have seen their core deposit rates remain stable with balances increasing over that time period.