those into a healthy position. And [with inflation] they’re determined to do just that. Are we headed for a recession? Are we in one now? If you’ve studied economics, you’ll know that every economy is headed for a pause or slowdown. Unfortunately, we’ve grown accustomed to believing that recessions are deep and painful because the last two were so severe. But not all are. So I think we’re going to see adjustments, but without the same agony and pain as the last two recessions. I hope you’re right. So how should bankers be responding to the Fed? Should they be raising rates? Yes, but not across the board. To ignore that rates are rising in the wholesale markets would be a mistake; in the non-loan market, banks can get good rates for a very short duration. Why would they not pay something closer to those rates in this environment, knowing that the Fed is going to be aggressive? It’s hard to understand that banks can simply opt out when the wholesale world is giving them riskless profit opportunities. Some banks gained so many deposits during the pandemic that they wanted a certain amount off their books. Are they right? A bank may have a low loan-to-deposit ratio relative to its history, but it can make money by deploying assets today — that’s the part that’s hard for some to see. Digital banks and neobanks, competitive threats that didn’t exist 15 years ago, are more than happy to relieve banks of the burden of paying something materially less than Fed Funds for insured deposits. So I think the question [for banks] is, do I have enough capital? If so, I’ll take these assets. But I have to figure out how to negotiate with depositors without paying everybody higher rates. Continued on page 22 To ignore that rates are rising in the wholesale markets would be a mistake; in the non-loan market, banks can get good rates for a very short duration. Why would they not pay something closer to those rates in this environment, knowing that the Fed is going to be aggressive? It’s hard to understand that banks can simply opt out when the wholesale world is giving them riskless profit opportunities. September • October 2022 21
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