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Strategic Considerations on the Path to Normalized Rates

August 24, 2016

By: James A. Swanson

In mid-July, FDIC Chairman Martin Gruenberg testified in front of the U.S. House of Representative’s Committee on Oversight and Government Reform.   Amongst the items discussed in his testimony was overall community bank performance.  His full testimony can be found at https://www.fdic.gov/news/news/speeches/spjul1316.html.

His synopsis noted sustained favorable post-crisis trends through 2015 on many fronts including earnings, loan growth, loan portfolio quality, and the number of problem and failed institutions.   His upbeat comments were tempered, however, when he noted that through 2015, community bank margins were still off over 40 basis points from the 10-year average pre-crisis, and that “margin pressure is likely to remain a challenge until interest rates rise to levels more in line with historical norms.”   

While we will leave the details of deciphering what “historical norms” mean to the industry’s economists and statisticians, what we all in the industry likely know is that excluding the 25 basis point increase at the end of last year, the Prime Rate has been declining or flat for a decade, and has been under 4.0% for nearly 8 years.  The last time prime rate was at 3.5% was 1958, but in the following eight years moved upwards by 200-250 basis points.  In fact, the combination of the sustained ultra-low rate environment coupled with nominal rate movement over the period is really unprecedented since the  years during the Great Depression and leading into WWII.  1,2

While the current seven-year economic expansion has supported broad-based improvement in bank financial performance according to Chairman Gruenberg’s testimony, it has had a tenuous feel to it, and seemingly been marked by one delay after another in the Federal Reserve’s plans to raise interest rates.   While some level of rate increase still seems inevitable, perhaps the most looming question beyond when this will happen is if we are simply experiencing a delay in returning to that historical norm, or are we migrating towards a new historical norm?  Obviously, none of us have the crystal ball to answer that question, but in terms of your institutions’ longer term strategic and financial planning, it may be beneficial to consider both alternatives. 

Another consideration as we ultimately move towards a more normalized interest rate environment, whatever that might be, is that much of the heart and soul of your future customer base, the Millennial generation, has come of age in todays’ sustained low rate environment.  To them, a low and never changing rate environment is their “normal”.   As a result, many will likely need coaching and advice in managing the impact on their personal and business finances, as well as planning for the home and other major asset purchases that many have delayed out of personal choice or lack of sufficient financial resources.  This should play right into the wheelhouse for opportunistic community bankers dialed into to their customers’ needs.

1.  http://www.fedprimerate.com/wall_street_journal_prime_rate_history.htm

2.  http://www.moneycafe.com/personal-finance/prime-rate-history/


About Bank Strategies LLC 

Bank Strategies, LLC is a Denver, Colorado based consulting firm founded in 1982 that provides a wide array of enterprise-wide risk management solutions which assist executive management teams and Boards of Directors of mid- and lower-tier size financial institutions in improving overall performance and profitability, assessing and controlling risk profile, and strengthening shareholder value.   Bank Strategies LLC and its team of professionals are well known and respected in the community banking sphere of banking institutions, attorneys, CPAs, trade association executives, and the press due to their quality of service, expertise and knowledge. More information is available at www.bankstrategiesllc.com.

To learn how the Bank Strategies LLC team can put more than 100 years of collective industry experience to work in helping your institution reach its potential as a high performing bank, call 303-903-9369. Or email Jim Swanson at jim@bankstrategiesllc.com.

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