Pub. 9 2019-2020 Issue 3

16 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S www.coloradobankers.org I t’s been about four months since the famed yield curve, which plots bond yields from shortest maturity to longest, inverted for the first time in nearly a dozen years. The yield curve is considered a barometer of economic sentiment, and this turnaround has been seen to signal a potential massive slowdown for the US economy. In essence, an inverted yield curve means that bond holders are willing to settle for lower long term yields because they think an economic recession is in the near future. For bank s , e spe c i a l l y c ommun i t y institutions whose bread and butter is lending, this inverted yield curve typically means there is much less gain to be made on loans. Smaller lenders are also at a disadvantage in this environment, because they do not run large trading desks or money-management units, which for larger bank competitors can help significantly to offset the overall reduction in interest rates when the yield curve inverts. Indeed, even as of a year ago, when the inverted yield curve was just a glint in economic pundits’ eyes, the KBWBank Index had already fallen 1.5% for the year, which in turn also took its toll on the value of bank stocks. While many economists and government regulators have downplayed recession concerns and economic worries, community institutions are likely to feel more of the brunt of this inverted yield curve. TheDallas Federal Reserve Bank, among other economic prognosticators, have heralded the fact that while yield-curve inversion typically lasts a year or less, the flattening is likely to affect these institutions and reduce their profitability much more than larger financial institutions. With this in mind, here are a few steps that may help, based on our work with our hedging clients: Focus on fee generation to manage short- term earnings. How to Ride Out an Inverted Yield Curve FEATURE ARTICLE BY MATT HELSING, SVP, REGIONAL MANAGER - NORTHWEST For banks, especially community institutions whose bread and butter is lending, this inverted yield curve typically means there is much less gain to be made on loans.