During the last ten years of economic expansion, prudent bankers were planning for the next downturn. Everyone knew that the economic expansion would end, but no one could be sure when or how. Smart bankers managed their business by accepting that all expansions do eventually reverse. None of us can predict the future, but enterprising bankers were conducting business to craft better results for their banks by understanding that an economic pivot would come.
We have written numerous blogs about why banks should reconsider the risk-for-yield business model when it comes to credit or interest rate risk. The return on equity (ROE) in risk-for-yield businesses is low, and the business outcomes during downturns are adverse. Instead, banks should construct an advisory business where taking risk may be just one element in delivering a customer-centric solution.
On October 30, 2019, the FOMC decided to lower the target range for the Fed Funds rate to 1.5% to 1.75%. The decision was not unanimous, and two members voted not to lower the target range. In the FOMC statement and at the post-meeting news conference, the committee’s communication was clear in that the future path of Fed Fund rate will be data-dependent, and the indication is that the “mid-cycle adjustment” is done. The key takeaway is that rates may move up or rates may move down in the future depending on economic developments. The question for many bankers and borrowers is how to v
Bankers should consider the shape of the yield curve when structuring and pricing loans to maximize return and reduce risk. The shape of the yield curve can also help lenders understand borrowers’ needs and better position the bank against competitors.
A flat yield curve has us scratching our heads – should we be originating fixed or floating rate loans? If bankers believe that the current shape of the yield curve is a harbinger of an impending recession, then booking fixed rate loans may be a winning strategy. However, if you believe, as we do, that there simply isn’t enough data as yet to point with a moderate degree of confidence to an economic recession in 2019 or 2020 then booking floating rate loans may be a better strategy. We have developed a technique and loan structure to assist bankers who espouse the former scenario and are
Every year we analyze the historical cost of funding earning assets (COF) for all banks in the country. We perform this analysis on every bank from 1990 to the present to understand the drivers of COF, how banks can improve performance by controlling their COF and how funding costs will behave in the future.
One of the best ways to become a better banker is to pay attention to your competition and analyze their strengths and weaknesses. We pay particular attention to term sheets and commitment letters from other banks to learn what other banks are doing well and where they make mistakes. We intend to capitalize on competitors’ weaknesses and to learn to address and respond to other banks’ strengths. We recently reviewed a term sheet that we thought highlighted some in
There are vast opportunities for community banks to differentiate themselves from their competition and create substantial value-add. One technique that we and other banks are having success with is the use of forward commercial loan commitments. This is a structure where your bank locks in loan terms that may start in the future. Forward periods range up to 24 months and average about 13 months.
Go to any bank conference, bank investor gathering or analyst meeting and the hot topic is the slowdown in deposit growth. As the economy keeps rolling and the Federal Reserve continues to raise rates, the topic of a bank’s increasing cost of funds, slowdown in deposit growth and the jump in liability interest rate sensitivity are on everyone’s minds.
At last we left off on the story of the Secured Overnight Funding Rate (“SOFR”), SOFR just started trading (HERE). At that time, we discussed the very first rate setting, the rare wonder of seeing a new index created and what bankers need to do to prepare for the possibility of using a new index in their investment and loan process. Now, as of last week, there is a newly created futures market.