Rising Rates Are Here Again: Time to Celebrate or Danger Ahead?

Some bankers are euphoric now that the yield curve slope has finally returned to positive as interest rates have risen 100bps on the long end of the curve and fallen by the same amount on the short end. This “surprise” jump in longer term rates arose post-election in anticipation of tariffs, higher inflation, lower expected taxes, and less regulatory burden… all positive for bank earnings if everything unfolds as planned. Sound familiar? Déjà vu from 2017!

Some wild cards to consider: To what degree will higher rates last and slow down the economy (stagflation?). More importantly, what about the slope of the curve? The positive impact of rising long term rates has been a boon for margins and reinvestment rates but has reversed the gain in asset values from September and elevated the “unrealized losses” in bank balance sheets. At the same time, gains in non-maturity deposit valuations have offset the impact on the investment portfolios for most, resulting in a net positive for economic value. It is critical for management and particularly board members to understand this concept and embrace the new environment. Earnings at risk versus value at risk: the distinction is important.

Many bankers will hit the “panic” button at precisely the wrong time and take action they may regret down the road. A well-informed and focused ALCO has far better odds of balancing current earnings needs with the challenges of the new rate cycle.

What have we learned from previous rate cycles, and what strategies should you consider this time around?

Articulate to ALCO, the Board, and examiners the impact of rising rates to earnings (NII), EVE/NEV, and investment portfolio values; the differences are critical and most often misunderstood
Take advantage of these higher rates and dollar cost average into rising long rates before the opportunity evaporates
Lenders Tool Box: Explore profitable loan pricing tactics and strategies to remain competitive; calculate the capacity and inflection point for longer-duration assets with confidence
Deposit Game Plan: Manage cost of funds, balances, and growth with pricing discipline and data; don’t underestimate the power of data analytics.
Be prepared with ironclad policies in anticipation of a potential rise in wholesale funding in 2025 and the years ahead
Be aware that many will exceed self-imposed policy limits in 2025; learn what to do about it and don’t panic!
Don’t forget to buy protection for falling rates

Are you sure that you’re prepared for rate uncertainty? Want a second set of eyes?

Contact us for a complimentary ALCO Package Review and 45-minute Strategy Session with DCG Managing Director Frank Farone.

For more insights from Darling Consulting Group, click here.

Frank Farone is a Managing Director at Darling Consulting Group and consults nationwide with CEOs and CFOs to increase earnings through the proactive management of capital, liquidity/funding risk, and interest rate risk. He is a frequent speaker and author on topics such as industry issues and trends, funding solutions, regulatory issues, interest rate risk management, capital management, and derivatives hedging techniques.

Frank was designated a “top-rated” speaker by FMS and is well known for his popular seminar “Turbo Charging Your ALCO Process.” He has helped thousands of bankers across the country.

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