*Data from Bloomberg and S&P Market Intelligence The global pandemic set into motion a series of historically unprecedented economic policies. Massive amounts of liquidity and stimulus from policymakers enabled a fast recovery, but at what financial cost? The side effect of those “easy money” conditions has been 40-year-high inflation that now must be fought through highly restrictive Fed behavior. Balance sheet managers have been left to deal with the resulting large swings in the interest rate and liquidity risks. Rapidly increasing cost of funds, stubborn loan rates, and ever-tightening margins are just a few of the most common worries for 2023. Reviewing industry figures from 2005 – 2007, the last time yields were around these levels, could help us better understand and prepare for what might be ahead. Just how much margin pressure should we expect from cost of funds in 2023? Well, if we look back at the last time the three-month treasury was north of 4%, the industry cost of funds was between 2% and 2.72%. While I don’t expect us to reach those levels in just 12 months, it is certainly possible, given wholesale funds near 5% and CD specials already north of 4%. For strategic planning, budgeting, and asset pricing purposes, we should be assuming a large increase in cost of funds over our current 0.37% level. Cost of Funds vs 3mo TSY - All Banks < $108 *Data from Bloomberg and S&P Market Intelligence Balance sheet managers have to remember that time is not their friend when it comes to managing margin. Increasing our average loan yield takes a good amount of time from the initial change in offering rates, especially for longer, fixed-rate loans that are already on the books and not repricing anytime soon. On the other side, increases in the cost of funds are felt immediately across all balances. The one main exception is CDs. However, with CD specials, we need to factor in deposit cannibalization from lower-rate deposit accounts. Gross Loan Yield vs 5yr TSY - All Banks < $108 17
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