Garnet Capital Advisors Blog

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Rising interest rates will have an ongoing impact on a bank's ability to secure deposits. Granted, higher rates will increase the profitability of the banking sector, but only if those lenders can attract a sufficient volume of deposits. Since we are anticipating as many as three additional rate hikes from the Federal Reserve in 2018, liquidity will be an ongoing challenge for banks in the coming year. Periods of rising interest rates can create liquidity challenges for banks.

How Rising Interest Rates Will Impact Banks

Over the past decade, lenders have had no issues with liquidity. A combination of a slow economic recovery and historically low interest rates resulted in many consumers keeping funds in their deposit accounts. A lower demand for loans meant that lenders had no issues matching funds to their needs. 

As interest rates have begun to rise, there is now more competition for consumer deposits. Provided loan demand also improves in the coming year, lenders may face liquidity issues as their cost of funds has increased. 

Analyst Brian Zabora of the Hovde Group believes that we are already seeing upward pressure on deposits in several areas. For example, rates on CD specials and those offered by online banks have gone up faster than normal. Zabora reports that by the beginning of December in 2017, rates on special offers for 10- to 18-month CDs across six metro areas had increased a median of 33 percent. Over the same period a year earlier, the increase was just 24 percent.

Banks need to attract more deposits as well as adjust portfolios to remain profitable going forward.

Attracting Deposits in a Changing Environment

As it becomes more competitive to attract deposits and the cost of lending increases, banks will need search for ways to bring in more deposits at a lower cost. One way to do this is by offering a wide range of products such as CDs, wholesale deposits, and rewards programs. Some banks have even offered cash incentives to customers to open deposit accounts and set up direct deposits. Several banks have also implemented a new CD product called a "bump-rate CD," where a customer is able to change the interest rate one time over the life of their investment should interest rates rise.

Even these promotions and special products may not place lenders in the optimal position because they aren't considered long-term solutions. In today's information age, consumers have become much more willing to transfer their business to another lender if offered a better deal. This is why it's become so important for lenders to continue to emphasize relationships along with innovative financial solutions.

Lynn David, President of Community Bank Consulting Services, reports that about one-third of bank customers have just one product with their institution. This opens up cross-selling opportunities to banks that know how to foster strong relationships. Commercial customers are less likely to jump to other banks unless provided with the right reason. The job of today's financial institution is to give both consumers and business owners reasons to stay as well as incentives to expand their deposits.

A Loan Sale Advisor Can Help Maximize Profits

In an environment of rising interest rates, the cost of funds for lenders is going to rise, so it makes sense to adjust portfolios accordingly. A whole loan broker can assist banks in getting more adjustable and short-term assets on their books by buying and selling loans in the right asset classes. 

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