2021: A new year with similar challenges

In the wake of the financial crisis, we saw banks skew their IRR models towards asset-sensitivity. Part of that change was the result of reduced loan demand, but another part of the shift came from the incorrect notion that “rates are at all-time lows – they can only go up from here.”

Since 2008, the average Fed Funds rate has been 0.69%. Rates did rise, albeit briefly, on a couple of occasions, but growth was tepid and central bank assets were ballooning. The forces to increase rates just never got any sustainable momentum.

With the shadow of the pandemic looming over every decision we make, loan demand has cooled significantly across most markets. This will only nudge our banks further toward asset sensitivity. Margins are already contracting, but much of that contraction has been obfuscated by the wide margins of PPP loans. As PPP rolls off the books, that hidden margin compression will be uncovered.

When major economies provide extraordinary monetary and fiscal accommodation to counter financial crises, it takes decades, not years, for rates to return to pre-crisis levels. This time could be different, but if it were, it would be unprecedented. Betting on rising rates has been a terrible bet for the past 13 years and a bad bet for the past 30 years. And now, the deck is stacked higher than ever against it being a good bet anytime soon.

TIB Capital Markets officers have an average of 25 years’ experience in bank portfolio/interest rate risk management dealing with banks of all sizes and structures. We are here every day to help you and your staff manage your balance sheet through these unprecedented times.

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