Average Maturity of Funding Decreases as Rates Rise

November 15, 2022 | Wholesale Funding Update

During the pandemic, institutions were flush with deposits and short-term interest rates were at the zero lower bound. As a result, funds available for interbank lending were abundant and cheap. In response, many institutions purchased funding with long maturities, with terms of anywhere from 2 to 10 years or longer. By doing so, these institutions locked in low-cost, stable funding.

Now that interest rates are rising aggressively, institutions are less enthusiastic to purchase long-term funding and lock themselves in to a high rate. Uncertainty about the path of interest rates, mixed with trepidation about the state of the overall economy, seems to have banks favoring shorter-duration funding options, which allow them to remain flexible in response to new economic conditions.

We can see these dynamics born out in the weighted-average maturity of funding on banks’ balance sheets, shown in the figure below [1]. Over the past six years, the weighted-average maturity of borrowed funding has been 1.6 years, as institutions purchase anywhere from overnight to 1 year to longer funds. One year ago, at the end of Q2 2021, the weighted-average maturity rose to 2.2 years, as banks purchased and locked in low-cost, long-term funding. However, as of Q2 2022, the weighted-average maturity has fallen back down to 1.7 years, a decrease of 24% compared to a year ago, as banks shy away from the more expensive long-term options and allow their longer-term funding to mature.

We expect the trend towards shorter-duration funding options to continue until there is more certainty around the future path of interest rates (which might take a while).

Best,

Paolo and the ModernFi Team

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Current rates

Change from two weeks ago

Sources: FHLB Advances are an average of FHLB Boston, FHLB Chicago, and FHLB Des Moines. Brokered CDs are an average of Fidelity and Vanguard. Listed CDs provided by National CD Rateline. US Treasurys and LIBOR provided by WSJ. SOFR provided by CME.

[1] Figure is constructed using data from the FDIC’s Statistics on Depository Institutions. Weighted-average maturity equals the sum of maturity multiplied by amount of funding of that maturity over the total amount of maturity funding, where the sum is taken over all maturities.

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