United States: Towards the erosion of bank net interest margins?
|The structure of deposits on the balance sheets of FDIC-insured institutions has followed an unusual trend recently.
During previous monetary tightening phases, the transmission of the increase in the Fed funds target rate to the rate of return on time deposits and other non-banking savings products had increased the opportunity cost of holding deposits with little or no remuneration. As a result, the weight of demand deposits and savings accounts on bank balance sheets tended to contract.
Since 2015, in contrast, they have continued to swell. The abundance of deposits – a legacy of the Federal Reserve’s quantitative easing policy – provides little incentive for banks to compete for deposits. In an environment marked by a very slow upturn in rates from exceptionally low levels, savings investors have maintained a strong preference for liquidity. With further monetary tightening and greater competition for deposits (Basel liquidity requirements, emergence of new competitors) this trend is nonetheless likely to be reversed, to the detriment of net interest margins.
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