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2022 with what has happened in 2023. As of July
yield of those loans in the future may be close to
26, the federal funds rate had already increased
or below the terminal rate of the bank’s funding
by roughly 100 basis points — creating more
cost, which could still be rising. On top of that, any
pressure on banks, not less. The interest rate en-
loan that needs to be refinanced can expect to face
vironment has caused near-tectonic shifts, and the
a higher new rate — a dynamic that continued in
environment has yet to stabilize.
2023 and could crystalize into credit risk.
“It had various, strange impacts through the
year which aren’t necessarily fully understood,”
Baldwin says. “There were times when lenders
came to me and said, ‘We don’t even understand
how another bank made this deal or why it was
“If you want to keep your clients happy,
you don’t want to shortchange them on a
long-term basis. ... We think we are paying a
little bit above average in our deposits rate,
so [clients] feel their money is not being
wasted and not being shortchanged.”
structured in this way.’”
In order to survive, boards and executives will
need to actively manage both sides of the balance
sheet, avoid getting burned on mistimed rate bets,
and stay attended to the fundamental and emerging risks they face. Most banks can hope to endure
this economic cycle without taking fatal losses.
But some will thrive, cresting the economic waves
rather than being buffeted by them.
“Banks that stick to their processes, and management teams and the board holding their bankers accountable, really shows up when you get into
these periods that we just haven’t seen before,”
Li Yu / Preferred Bank
says Coffey. “A bank that has been doing what the
crowd has been doing, they’re going to move with
the crowd in a downturn, right? It’s that iconic,
classic approach to banking, where you do what
Interest income, it seems, has peaked, but for
many banks, interest expense is on the rise. In ad-
you do best, that really stands out when we hit
these periods.”
dition to liquidity and interest rate risk, the emergent concern in 2023 is now credit risk: How will
Kiah Lau Haslett is the banking & fintech editor at
high rates impact borrowers’ ability to repay their
Bank Director.
loans?
Kara Baldwin, an audit partner at Crowe, says
elevated loan demand in 2022 was a “mixed bag”
for the industry that could make growing loans in
the future harder. There’s also the issue of loan
structure: Banks may have made fixed rate, long
duration loans in the first half of 2022 that lost
their value by the end of the year as rates continued their relentless climb. The outlook for the