How Did Banks Behave When The Fed Last Hiked Rates?

By Chris Marinac | April 19, 2017

When the Federal Reserve raised short-term interest rates from June 2004 to July 2006, there were distinct behavior patterns at banks. Investors today should understand how banks reacted as a new era of rate hikes have already begun since December 2015.

The FIG Research team examined how banks’ pricing and balances shifted under +425 bps higher rates and found the following:

  • Investors must recognize that banks’ lagged on deposit and loan rates when the Fed raised rates significantly in 2004 to 2006
  • As rates rose, a majority of institutions experienced an uptick in construction loans but lower mortgage balances. Meanwhile other categories were mixed with banks both increasing and decreasing their exposure (without a definitive trend).
  • Deposits shifted towards CDs over the 2-year span of Fed tightening its short-term rate policy target from 1.00% to 5.25%

Primarily, there was a real lag in both deposit and loan re-pricing compared to the actual rate uptick on Fed Funds as we studied quarter-by-quarter changes in both deposit costs and loan yields for over 220 publicly-held FDIC bank charters.

In addition, loan and deposit categories shifted plus a higher loans-to-deposits ratio ensued as rates climbed. Over 60% of banks had expanded loans faster than deposits while rates rose.


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