The Unequal Increase in Interest Expense
December 5, 2023 | ModernFi Insights
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.
The ModernFi Team
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.