7 Ways Banks Should Respond to the Fed Rate Hike

The last time the Federal Reserve increased rates was 2006. After predictions and discussion of a rising rate environment for a while, a unanimous vote brought the interest rate up a quarter-point this past week. While Chairman Janet Yellen says that future rate hikes will “come slowly” and such a minimal increase is unlikely to move the needle much, it warrants community banks taking the time to consider how it will impact balance sheets – in light of how it will influence customer behavior.

The HORNE Banking team has rounded up seven key points your bank should consider as you prepare for a tightening interest rate cycle in 2016. 

1. Deposits will chase yields. Banks that want these type of deposits should make sure they have a strategy in place to retain them.
2. Customers will try to lock in rates for longer time periods. You need a plan to get in on the front end (i.e., structuring loan products or derivative strategies).
3. The rise in rates could hurt credit quality on variable-rate loans.  As rates increase, it can cause a squeeze on borrower’s cash flows. Consider how preemptive you want to be about refinancing your existing commercial book.
4. Assets and liabilities will be impacted. Analyze your asset-liability strategies based on the assumption that rates will continue to increase and modeling under various rising-rate scenarios.
5. The housing market could get stronger. A modest increase in rates added to a stronger jobs market equals a strong housing market. By increasing margins per loan, your bank may be able to lend more and serve more customers.
6. Interest sensitive accounts may surge. If your bank relies on interest sensitive NOW or savings accounts, consider shifting your deposit strategy to focus more on low-cost deposits.
7. The mix between variable and fixed rate loans will flip. As rates rise to disengage the rate floors, it may lead to credit issues and borrowers looking to refinance into longer term fixed rates.

As we watch the results of this cycle, it will be interesting to see how the market will adjust. Along with the fresh start of a new year, the Fed’s decision gives your bank a good reason to plan for an even more disciplined and diligent 2016.

While the rate hike isn’t major, it’s sure to have some ripple effect. Is your bank prepared?

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