The current rate cycle has been a challenging one for many institutions across the country. Rising rates have led to deposit runoff and asset write downs. However, the pressure that many are facing has not been spread equally; small and mid-size banks have been disproportionately affected. In addition to weathering greater threats of deposit runoff, small and mid-size banks have had to pay more to retain deposits, compressing net interest margins. The end result has been further consolidation of deposits and profits at the largest institutions.
Incorporating the Q3 data that was released last week, we find that interest expense at small and mid-size banks has increased by significantly more than at the largest institutions. While the “too big to fail” institutions have experienced an inflow of deposits without having to increase yields, small and mid-size banks find themselves competing to attract and retain deposits with higher rates. Following the pattern we found for reciprocal deposits, we find the largest midsize banks have seen the largest increase in interest expenses.
According to the FT, “of the nation’s almost 4,400 banks, the big four made 45 per cent of the industry’s overall profits in the third quarter.” To sum up our thoughts, we find this trend to be worrisome and detrimental to the health of the U.S. economy. We have spoken at length about the importance of the diversity and scale of the U.S.’s community and regional banks, and, at ModernFi, we are fully focused on supporting the growth and efficiency of small and mid-size banks across the country.
Best,
The ModernFi Team
Current rates
Change from four 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 provided by WSJ. SOFR provided by Chatham Financial.
Deposit data aggregated by ModernFi from FFIEC Call Reports as of 9/30/23.
Disclosures:
All information contained herein is for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation or recommendation to purchase any security, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Past performance does not guarantee future results. The information contained herein is for institutional use only.
ModernFi Advisers LLC (ModernFi) is not a bank, nor does it offer bank deposits and its services are not guaranteed or insured by the FDIC; ModernFi allocates funds to banks that are FDIC members.
Certain information contained herein has been obtained from third party sources and such information has not been independently verified by ModernFi. No representation, warranty, or undertaking, expressed or implied, is given to the accuracy or completeness of such information by ModernFi or any other person. While such sources are believed to be reliable, ModernFi does not assume any responsibility for the accuracy or completeness of such information. ModernFi does not undertake any obligation to update the information contained herein as of any future date.
Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.
Except where otherwise indicated, the information contained in this communication is based on matters as they exist as of the date of preparation of such material and not as of the date of distribution or any future date. Recipients should not rely on this material in making any future investment decision.
