Banking’s 2023 Naughty & Nice List
This holiday season, many bankers would love to put a few lumps of coal in the Federal Reserve’s stocking.
Though its actions — significantly, raising the federal funds rate 11 times since March 2022 — have been painful for banks, the Fed has made progress in its goal to reduce the rate of inflation. On Dec. 12, the Bureau of Labor Statistics reported a 3.1% increase in the consumer price index for the past 12 months through November. A year ago, that number was 7.1%.
That 3.1% increase is still north of the Fed’s 2% inflationary target. Assuming the Fed doesn’t revise that goal, that has me questioning projections for modest rate cuts in 2024. But even with a predicted 75-basis point reduction, it will be hard to mitigate the damage resulting from continued higher rates on banks and their borrowers, which I explored in a fourth quarter cover story, “Credit Storm,” for Bank Director magazine.
Academic researchers also explored this problem in a December 2023 paper titled “Monetary Tightening, Commercial Real Estate Distress, and U.S. Bank Fragility.” They estimated that the double whammy of declining property values and higher vacancy rates could have 44% of office loans underwater, with current property values below borrowers’ outstanding balances. Many of those clients are also experiencing problems with cash flow; refinancing at a higher rate would prove difficult. The researchers predicted that if interest rates don’t meaningfully decrease and property values don’t improve, default rates could rise precipitously, ranging from 10% to 20%.
And regulators are paying attention, too. In a financial institutions letter early this week, the Federal Deposit Insurance Corp. replaced its 2008 advisory for managing CRE concentrations, advising banks to maintain strong capital levels and appropriate credit loss allowances, closely manage loan portfolios, strengthen loan workout processes and be proactive about liquidity.
If higher rates have the Fed on banking’s naughty list, then who’s on the nice list? I’d point to conservative community bankers who understand how to run their institutions through good times and bad.
As Home BancShares CEO Johnny Allison told me recently, “Banks doing silly stuff hurts” the industry. That can be anything from offering above-market rates on deposits to risky loans.
Conservative banks already know how to work with borrowers — and understand when to let some loans walk.
• Emily McCormick, vice president of editorial & research for Bank Director