NEW YORK–(BUSINESS WIRE)–KBRA Analytics publishes this month’s edition of The Bank Treasury Newsletter, Bank Treasury Chart Deck and Bank Talk: The After-Show.
With the Fed poised to take off, this month’s newsletter, Bank Treasurers Have Options, features the latest turmoil in interest rate markets versus the history of the Treasury 2s yield curve -10s around 1979 to 1982, when the yield curve steepened and inverted several times as the Fed last engaged in a serious war on inflation. Discussing highlights from the minutes of the January 2022 Federal Open Market Committee (FOMC) meeting, the newsletter examines the rise in Treasury yields from the perspective of their relative term premia and how the Banks’ cash strategy is focused on keeping bank balance sheets the same or even more asset-sensitive to take advantage of the rate hikes they expect to follow this year. Economic and rate assumptions in the 2022 Comprehensive Capital Analysis and Review (CCAR) are reviewed to better understand how close regulators believe the interest rate cap will be in this next rate hike cycle by compared to the last cycle between December 2015 and December. 2018.
The prospect of higher interest rates has fueled the valuation of bank deposit franchises, increased acquisition costs and, as the bulletin indicates, will likely slow the pace of recent mergers and acquisitions. Yet, as the article also reports, the optimism of financial market managers, banking and non-banking, is unwavering, with rising demand in the loan market based on the latest Fed loan survey. . Given that banks are reporting that much of their business is in floating rate assets, which aligns with their broader asset-sensitive balance sheet goals, the bulletin concludes by examining the adoption of the Overnight Secured (SOFR) replacement for the London Interbank Offered Rate (LIBOR) for small business loans. According to the Alternative Reference Rates Committee, $100 billion of SOFR-indexed leveraged syndicated loans were issued in January 2022, many multiples of new non-bank LIBOR facilities issued.
The Bank Treasury Chart Deck analyzes the evolution of the net interest income of Federal Deposit Insurance Corporation (FDIC) banks during the last three cycles of rate hikes since the beginning of the 21st century – between Q2 1998 and Q3 2000, Q2 2004 and Q2 2006 and Q4 2015 and Q4 2018 – and how rate and volume changes impacted growth. We then show how the front part of the yield curve, from 1 month to 12 months, has already adjusted to the rate increases expected during the year. Since the start of the year, when banks were banned from issuing new loans with LIBOR, the futures and options markets have been studied by SOFR watchers to see how trading volume and open interest changed in Eurodollar and SOFR contracts. The remaining slides look at how recent changes in the Fed’s balance sheet liabilities track changes in the overall bank deposit balance.
In this month’s edition of Bank Talk: The After-Show, Van and Ethan discuss bank operating leverage, a measure of efficiency that compares growth in net income to growth in non-banking expenses. interest and how this measure relates to the traditional efficiency ratio. Ethan explains how analysts are now focusing on operating leverage as they expect net interest income growth to accelerate as the Fed raises rates. The two also examine recent trends in payroll and benefits spending and how, despite all of the industry’s technology investments and branch closures, it has still not been able to materially capture the savings that impact the net result.
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