Bank Executives Expect Funding to Tighten in 2022

Despite likely interest rate hikes, many bankers expect the economy to improve over the next year

As the Federal Reserve accelerates its plans to taper and raise interest rates this year, bankers are prepping for an increase in funding costs, according to a new IntraFi Network survey of executives at more than 400 institutions.

In the fourth quarter survey, 63% said funding costs will worsen moderately or significantly over the next 12 months—a stark 34-point jump from just a quarter earlier. Similarly, 42% of bankers said deposit competition will increase moderately or significantly over the next year, an 11-point increase from the third quarter survey.

The anticipated pressure on funding comes after banks have enjoyed historically high levels of liquidity during the pandemic.

Latest Fintech News: Wego to Acquire Cleartrip’s Middle East Business from Flipkart

“With the Fed’s actions, banks need to think through their deposit strategy soon, developing an understanding of the likely deposit betas for their different customer segments,” said Mark Jacobsen, CEO and Cofounder of IntraFi Network. “Bankers need to consider which deposits will leave in search of more market-sensitive returns. And they need to think about how best to prepare themselves, including whether now is the time to lock in long-term wholesale funds at historically slim spreads.”

Regarding interest rates, 63% of bank executives expect the federal funds target rate to climb to between 0.75% and 1% in 2022. An additional nine percent estimate the federal funds rate will go even higher than the Federal Reserve’s so-called dot plot, which the U.S. central bank uses to signal its outlook for the path of interest rates. The survey was conducted from Jan. 4 to Jan. 18, before market expectations that the Fed would move more aggressively based on the most recent inflation and economic data.

Latest Fintech News: Bitshiba Announce The Rare No-Minting Fixed-Supply Token

Despite the prospect of higher rates, banker views about the future of the economy remained positive. Forty percent expect overall economic conditions to improve over the next 12 months, while another 40% believe conditions will remain the same. Only 20% expect conditions to worsen.

While several large and regional banks have moved aggressively to shut branches nationwide in the wake of the pandemic, many community institutions say they are keeping their current level of branches. Only 17% of bank respondents who work for institutions with $10 billion or less in assets said their institution has closed a branch since January 2020. Of those that did close branches, nearly three-quarters said it was to reduce costs, while half also said it was due to less foot traffic as customers have increasingly adopted digital and mobile banking channels.

Latest Fintech News: Talos Adds Access to OSL’s Global Digital Asset Exchange

Many employees at community banks appear to have returned to working in the office. Thirty-eight percent of those surveyed said no employees are working remotely, while the same number said only 10% or less of staff are working remotely full- or part-time. Just 10% of respondents said at least a quarter of their employees are working remotely.

Almost all bankers (95%) want better regulation of stablecoins (cryptocurrency that derives its value from an underlying asset, such as the U.S. dollar), including 31% who back bank-like regulations similar to the ones recently suggested by the President’s Working Group on Financial Markets.

This survey garnered responses from CEOs, presidents, and CFOs at 426 unique banks across the country.

Other Highlights

• • Funding Costs. Three in five (61%) said their bank’s funding costs had decreased in the previous 12 months, a 13- percentage point drop from the previous quarter.
  • Deposit Competition. Though the outlook for deposit competition increased significantly, a majority of bank executives (65%) claimed deposit competition remained stable in 2021.
  • Loan Demand. Fifty-nine percent anticipate loan demand to increase in 2022, a bump of 11 points from the previous quarter.
  • Access to Capital. Bank access to capital remained stable with 73% experiencing no change in the previous 12 months and 74% projecting no change in the year ahead.