Pub. 12 2021 Issue 2 30 West Virginia Banker Is Opportunity Cost Hurting Our Bottom Line? A s the U.S. economy continues to work its way 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 ef fect of fiscal spending being hot topics during board and ALCO discussions, the question becomes this: What should we do to prepare our balance sheet for what may come? However, for all these discussions about potential future challenges to earnings, seldom do boards and ALCOs discuss the revenues lost due to opportunity cost. 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 at near zero. With all the uncertainty in the economy, many financial institutions fall victim to sitting on the sidelines waiting for a clearer picture to emerge and are 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 began much earlier with the Federal Reserve acting quickly to soften the blow and lower rates. The drop in short-term rates was quick. The 10yr treasury followed suit, dropping from 1.60% at the start of the recession to a low of 0.55% by August 2020. Following that low, the 10yr started moving higher and currently sits around 1.60% at the time of this writing, a significant level given the behavior of past recessions. 3-Month UST vs. 10-Year UST Source: Board of Governors of the Federal Reserve System (US)/FRED By Greg Tomaszewicz, The Baker Group