Pub. 11 2020 Issue 4

www.wvbankers.org 12 West Virginia Banker Fighting Margin Compression in Today’s Rate Environment How We Got Here In 2009, some said interest rates had nowhere to go but up. Well, Treasury yields found a way to continue to go down and stay down. The Fed took seven years to increase the funds’ rate by a quarter point at the end of 2015, then another quarter point increase 12 months later, followed by seven more quarter point rate hikes in 2017 and 2018. All nine rate hikes were undone by the Fed in a short amount of time, with three of the rate cuts coming in the latter half of 2019 as part of a “mid-cycle adjust- ment.” The remaining reductions came in March as part of a historic monetary response from the Fed. Interest Rate Risk Since 2009, we have been looking at our interest rate risk models and fine-tuning our assumptions in order to measure, monitor and con- trol interest rate risk. Our ultimate goal was to answer the question, how much risk is there to our earn- ings and capital position if interest rates rise? To answer that question, we made sure our balance sheets were well positioned to take advan- tage of rising interest rates. That strategy allowed net interest mar- gins to expand slowly but surely for several years as the Fed engaged in its most recent tightening cycle. But that was then and this is now. The Fed has put rates back at zero, and it is highly unlikely we will see an increase in rates in the next few years, if not longer. At the start of 2020, most banks were well positioned for a rise in interest rates, not a freefall back to zero. Interest rate risk has already taken its initial hit on margins and By Dale Sheller, The Baker Group