Continued on page 26 Pub. 13 2022 I Issue 3 Fall 25 West Virginia Banker Strategically growing low-cost funding today is the key to successfully positioning your organization for tomorrow. Even if you have excess liquidity now, there isn’t a better time to grow low-cost funding by growing your customer base and increasing your checking and savings deposits. In addition, consumer spending is now soaring. According to a recent article in Bloomberg, the top four banks in the nation have seen a 27% average increase in consumer credit card spending for Q1 of 2022 vs. Q1 of 2021. Inflation is at record highs, and Federal Reserve Chairman Jerome Powell indicated early in 2022 that multiple 50bp rate hikes should be expected in the remainder of the year; this actually translated into the most recent 75bp rate increase. Unlike in previous rising-rate environments, financial institutions haven’t, until recently, felt the same pressure to raise rates in light of the excess liquidity in the system. That said, financial services analysts expect deposit betas in the 25-50% range over the next two to three years. For financial institutions, that means passing on 25-50% of these rate increases to our depositors. That is significant, and the response will not be the same for all institutions. Given this variety of possible responses, we anticipate seeing rate offers from financial institutions – most likely led by online and digital banks, with community-based financial institutions following at a slower pace and on a smaller scale. Assuming the bulk of this effort won’t happen until late 2022, and beyond, the question financial institutions must ask themselves is, “What should we do now?” Institutions with low-cost and less rate-sensitive funding are well positioned for any rate environment, especially the one we are experiencing. The chart below illustrates the deposit cost advantage when a financial institution has a lower cost of funding. The rate environment we are entering is similar to what we saw in 2016–2018. As rates were rising, the deposit cost advantage over peers dramatically changed. In a low-rate environment, it was small but grew to 63bp when rates were at the level we expect to see again in late 2022–2024.
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