Interest Expense on Domestic Deposits Increased 42% Last Year

​Two new posts in American Banker today address the responses of bankers so far in adjusting interest rates on deposits.  Rate wars: Leaders and laggards in repricing consumer deposits

American Banker		remove preview
Rate wars: Leaders and laggards in repricing consumer deposits Online banks and some credit unions are responding to Fed rate hikes by aggressively raising deposit rates on CDs, savings accounts and money market products, while the nation's biggest banks are largely standing pat - for now. View this on American Banker >

and Megabanks gird for battle over deposit pricing

American Banker		remove preview
Megabanks gird for battle over deposit pricing With rate hikes aplenty expected this year, Wells Fargo and Bank of America are said to be subdividing key markets to target deposit pricing in the future and minimize costs. These are among several innovative steps large banks are taking to prepare for more competition for deposits. View this on American Banker >

The pass through rate of market interest rate changes to depositors has clearly been greatest by online banks; followed by credit unions; generally followed by community banks; with large branch banks displaying very low betas.   With online banks and large branch banks having such large deposit bases, there is a potential for a great squeeze on community bank pricing if the large branch banks become more price aggressive as these articles suggest.  This could make last year's increase in interest expense of 42% seem small.  Could annual deposit interest expense on $12 trillion of deposits soon go from $41.6 billion to $200 billion?

------------------------------
Neil Stanley
President of Community Banking
TS Banking Group
Treynor, Iowa
------------------------------
-------------------------------------------
Original Message:
Sent: 03-13-2018 14:44
From: Neil Stanley
Subject: Interest Expense on Domestic Deposits Increased 42% Last Year

​The attached FDIC data reports that interest expense on domestic deposits increased 42% in 2017 compared to 2016.  Meanwhile Fed Funds rate has grown at an even faster pace.  This cost of $41.6 billion can be expected to grow significantly in 2018.  Given the anticipated depositor behaviors and the current trajectory of interest rates and composition of interest-bearing deposits where do you think interest expense will be by year-end?  How do banks need to address this major cost issue?

------------------------------
Neil Stanley
President of Community Banking
TS Banking Group
Treynor, Iowa
------------------------------