How Banks & Credit Unions Should Prepare for Rising Interest Rates

 The Fed is set to raise interest rates in 2022 faster than it has in decades. An overhang of excess deposits has many banks and credit unions wondering how to approach the coming year. Analysts say a key to remaining competitive will be aligning rates with relationships.

Bankers knew higher interest rates were on the way, but few expected the extraordinary pace at which they are now expected to rise. Previous rising-rate periods since 2000 have seen relatively modest rate hikes compared to what analysts are predicting now and it could have significant impact on bank and credit union deposit strategies.

March 2022 is when the first of several interest rate hikes from the Federal Reserve is expected to kick in, although the central bank didn’t specify timing in its official announcement. The quarter point increase would be the first increase since 2018.

Most forecasts call for at least four rate increases totaling 125 to 150 basis points over the course of the year. That’s a dramatic shift from earlier expectations, prompted by inflation surging to a level not seen in four decades.

“Clearly, we have entered into the rising rate environment that just a few months ago none of us were predicting for 2022. It’s now about how we navigate that, what do we do about it,” observes Brad Resnick, Director at Curinos.

To help assess the potential implications of these rate increases for banks and credit union deposit rate strategies, Curinos looked back to the last two rising rate cycles, 2004-2007 and 2015-2019. During a webinar on the subject they compared deposit rate sensitivity (beta responses) to those earlier Fed rate increases, and found that while rates rose faster in the 2004-2007 period, there was a more modest and methodical rate increase in the 2015-2019 period. CONTINUE READING