32 JULY / AUGUST 2021 DIRECTORS / SENIOR MANAGEMENT Opportunity Cost Is it hurting our bottom line? Greg Tomaszewicz Senior Financial Strategist The Baker Group gregt@GoBaker.com The Baker Group is a Preferred Service Provider of the Indiana Bankers Association and an IBA Diamond Associate Member. As the U.S. economy continues to work out of the recession brought on by the COVID-19 pandemic, many economists debate what the future will hold. With inflation, asset bubbles, rising rates and the effect of fiscal spending being hot topics during board and asset-liability committee discussions, the question becomes: What should we do to prepare our balance sheet for what may come? For all these discussions, however, seldom do boards and ALCOs discuss the earnings lost due to opportunity cost. Source: Board of Governors of the Federal Reserve System (US)/FRED 3-Month UST vs. 10-Year UST Opportunity cost lurks as a silent killer of margins, especially given the current abundance of liquidity in financial institutions. While tax returns and stimulus checks continue to add to the excess of liquidity, the earnings on those dollars remain near zero. With uncertainty in the economy, many financial institutions fall victim to sitting on the sidelines, waiting for a clearer picture to emerge, meantime missing out on the current opportunity the market is giving them. While the official start of the current recession was February 2020, the downturn in economic activity
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