PUTTING YOUR INSTITUTION’S BEST FOOT FORWARD FOR A LOWER-RATE ENVIRONMENT BY KENT MUSBACH, SENIOR VICE PRESIDENT, AND MARC GALL, SENIOR VICE PRESIDENT AND ASSET/LIABILITY STRATEGIST, BOK FINANCIAL CAPITAL MARKETS After transitioning from near-zero rates to one of the fastest rate-hiking cycles we’ve ever seen, financial institutions are now in the position of waiting for rates to fall. As we wait for the Fed’s next move, it’s important for management teams to understand how lower rates will impact their institutions’ income statements and take steps to better position themselves for the lower-rate environment likely to come. Many Financial Institutions Funding Their Balance Sheet Short First, let’s consider where we are now. Federal and consumer spending have been driving economic growth, despite the higher interest rates. This growth, in turn, has the markets thinking the Fed will delay rate cuts until later this year or possibly into 2025. Funding short has not yet worked out, with funding continuing to roll at nearly the highest cost on the curve. Coupled with continued deposit migration within the bank, cost of funds is continuing to rise at many institutions. Managing Expectations for Rate Cuts To manage margin this year, one question to ask is if your institution will need to offer the highest interest rate in the market for deposits or one that’s “just close enough” to that rate to keep existing customers. We find that, if the rates are close enough, the incumbent tends to win because consumers don’t want to deal with the hassle of moving their money. This strategy may allow your institution to manage the upward pressure in cost of funds (COF). Additionally, management teams may consider what realistic reprieve in COF may come from the first few Fed cuts. Many institutions have not raised non-maturity account rates in line with non-bank alternatives (ex. money market mutual funds). Consequently, community banks may be reluctant to reduce 14 In Touch
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