Hoosier Banker 31 meltdown and resulting Great Recession sparked many of the same uncertainties faced by risk managers today. Will low market yields create disintermediation and an erosion of core deposits? That was an outcome feared by many back then, even while the majority of community banks continued to watch those deposit balances grow ever higher. What will happen this time? What about the costs of those deposits? How much did your deposit rates rise during the nine rate hikes the Fed promulgated during its normalization phase? How much did they fall while rates were again cut during 2019? Now that we’ve returned to ZIRP, could those NMD betas be due for another change? For external sources of funding, how much will they cost, and what changes have occurred in their availability and terms? What new hoops might need to be jumped through? On the asset side, will growing loan demand soak up all available cash flow, or will the opposite occur thus adding more stress to already stressed net interest margins? Will lenders have any pricing power, or will competitive pressures control what borrowers ultimately pay? What are your loan betas and reinvestment rates? Should they be adjusted? For the investment portfolio, keeping an eye on the degree of embedded optionality might help avoid unwanted volatility in cash flow along with unwanted changes to duration. And don’t forget about your economic value of equity. Many portfolio managers have been loading up on long municipals this year, and there are some sound reasons for doing that. Remember, though, an extension of duration also means more exposure to market risk that will accelerate depreciation if rates rise. As unlikely as that prospect is, this whole year has been an unlikely prospect. And even though the evaluation of credit risk is not typically within the scope of interest rate risk management, don’t forget that those munis come with some. Outright defaults have not yet become a problem, but downgrades to an issuer’s credit rating can damage market value and liquidity. Take a Deep Breath and a Fresh Look The plates of bankers, particularly community bankers, are pretty full these days, and pausing to review the esoteric elements of a process that can sometimes be cumbersome can also be easy to defer. Assuming the assumptions driving your "We visit the site!" www.floodplain.com F C I Floodplain Consultants Inc. modeling exercises haven’t changed, however, could lead to misleading results. A review of those assumptions is not only a good idea, it’s a regulatory requirement. Unless you’re performing this review by yourself, stay at least six feet away from everyone else; the world has changed. HB #OpenToServe Video In partnership with the Alabama Bankers Association, the IBA created this video to communicate to the public that throughout the COVID-19 pandemic, Indiana banks are open, and they will always be ready to serve Hoosiers. Click on the icon above in HB Digital to view the video.
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