Though a steeper yield curve is better for bank profitability over the medium to long term, asset yields may be more responsive to reduced policy rates than liability costs in the near term. interest rates rise will work in reverse as rates decline. Second is the migration of non-maturity deposits into CDs. While most CDs feature relatively short tenures, this movement lengthens the average maturity of liabilities and will limit banks’ ability to reduce deposit rates in lockstep with policy rates. This delay is amplified for institutions in competitive markets, as your ability to lower deposit rates may be limited if others in your footprint are reluctant to do so. Both factors will course-correct over time, but a review of asset and liability betas from previous easing cycles suggests that it may take two years or more before the cumulative decline in funding costs meaningfully outpaces the cumulative decline in asset yields. During the transition period, strategies geared toward increasing asset yields become the best defense against continued margin pressure. Remixing the balance sheet, purchasing loans to supplement organic originations or repositioning a portion of the securities portfolio are several strategies that can be employed to drive incremental movements as a stopgap measure. NEBRASKA INDEPENDENT BANKER 7
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