By Rob Blackwell Chief Content Officer IntraFi Network The end of the great deposit flood may soon be nigh. Since the pandemic, banks have been saturated with liquidity due to a flight to safety and government stimulus. In December 2019, just before the pandemic started, total commercial bank deposits were roughly $13.3 trillion. Within a few months, by May 2020, they had jumped 16% to $15.4 trillion. By April 2022, they were over $18 trillion. While initially beneficial, the influx of deposits is proof of the adage that you really can have too much of a good thing. Banks have been awash in liquidity without much loan demand to deploy it. But with the Federal Reserve raising rates and rate-sensitive customers beginning to pull their deposits, bankers are wondering how sticky those customers — and deposits — will be. Combined with geopolitical events and the fact that the pandemic remains ongoing, the future is uncertain. So what should banks be doing now, and how can they best prepare no matter what happens next? On our podcast, Banking with Interest, we sat down with Scott Hildenbrand, chief balance sheet strategist at Piper Sandler, to find out the answers to those questions. Following is our conversation, edited for length and clarity: The Fed raised rates by 50 basis points at the last meeting and signaled it could keep moving aggressively until inflation is under control. How do you see things playing out? The bond market appears to be pricing in 10 to 12 rate hikes over the next couple of years, though I doubt we’ll get that many. Bank loan activity is a signal for growth in the economy and loan-to-deposit ratios are hovering near all-time lows. I’m more concerned with how quickly rates increase. There are 50-bps hikes priced into each of the next two meetings, and it will be interesting to see what that does to banks’ balance sheets. What's going to be the impact on deposit betas as rates rise? And does the size of the bank matter? I think it does. Big banks rely less on spread, so I doubt they’ll have to change deposit rates much. But smaller banks do rely — heavily — on spread business. Those institutions will probably feel some pressure over the next six to 12 months. But even they have some time. How Banks Should ‘Weaponize’ Their Balance Sheets: A Q&A with Piper Sandler’s Scott Hildenbrand www.coloradobankers.org 18
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