Correspondent Blog

The banking industry’s cost of funding earning assets (COF) is highly correlated to short-term interest rates. The Federal Reserve lowered short-term rates by 100bps in late 2024, with expectations of additional rate cuts in 2025. On average, community banks have not been able to lower their COF, now recognize the reality of a pause by…

Most bankers would refuse to accept risk without reward (or revenue).  It would make no sense to risk the bank’s capital without adequate compensation. However, some banks are inadvertently taking risk without any additional revenue. The yield curve is currently flat, and the average community bank’s cost of funding is highly correlated to Fed Funds…

Last year’s worries of deterioration in labor-market conditions have evaporated and the Fed is still harboring concerns about elevated inflation risks. Many banks budgeted some six rate cuts in their 2024 asset-liability plans last year that never materialized. Going forward, the major unknown is the new administration’s policies that all skew to higher inflation (from…

Most community bankers we talk believe they will get a boost to bank performance with declining short-term rates.  The thinking is that a lower Fed Funds rate will mitigate credit risk, spur loan demand and potentially soften competition for deposits, leading to wider NIM and more profitability.  Unfortunately, the empirical evidence shows otherwise.  While the…

Banking has now arrived at a speed that it cannot handle. While there have always been problems in banks’ asset-liability models (ALM) and liquidity stress test models, the current environment exacerbates this problem. Recent bank failures hurting public perceptions, the current market trends of higher rates, Quantitative Tightening, digital banking, social media, and a flight…

Last week we wrote about loan-level vs. balance sheet hedging for community banks and provided our loan proposal generator (HERE). We compared and contrasted the two strategies and sized the market for community banks. We also shared a table that summarized the two strategies. In this article, we will discuss what community banks should look…

The Federal Reserve is rapidly changing the interest rate environment to fight inflation.  The Fed’s actions are forcing lenders and borrowers to consider ways to protect cash flow, credit, liquidity, and interest rate risks.  Many borrowers ask lenders how they can use swaps, caps, floors, and collars to protect their businesses and lower borrowing costs. …