Buckle Up: This Cycle Isn’t for the Faint of Heart

We’re off to the races in what may be the most complex rising-rate cycle ever. Central banks around the world are raising rates faster than they have in the past and there’s no end in sight.

But that’s not all. An ultra-low starting point for rates, excess liquidity, an unprecedented rapid pace of quantitative tightening, digital disrupters and macro uncertainty add layer upon layer of intricacy.

In the face of such uncertainty, there are always pitfalls but also enormous opportunities. To avoid the one and find the other, banks must employ a range of data, analytical tools and customer-management techniques.

While the last rising-rate environment was less complex than this, it still displayed a difference in beta performance that is useful when considering the challenges of today. For example, the top 25% of U.S. banks saved 20 basis points (bp) of interest expense when normalizing for growth in the last cycle, translating to savings of $2 million per billion of deposits. (See Figure 1.)

Figure 1: Deposit Performance in Prior Rising-Rate Cycle

Notes: Growth between 2015Q2 and 2019Q2 | Ending rate as of 2019Q2
Sources: Curinos analysis, S&P Global Market Intelligence


We’ll start with the launch point and pace of hikes. As of June 2022, futures market data in the U.S. were indicating an additional 150-250 bp of Federal Reserve hikes by the end of the year, coming off a near-zero base. That comes on top of 150 bp of Fed hikes since March, including a whopping 75 bp increase in mid-June. Meanwhile, the Bank of England raised rates another 25 bp in June, representing its fifth increase since December, and said larger increases could be forthcoming. And the Bank of Canada has raised its benchmark rate to 1.5%.

Widespread publicity about the higher rates and inflation are already leading to more awareness from consumer and commercial customers. Moreover, the fact that we’re coming off near-zero rates in many segments of traditional bank portfolios will make it harder for banks to significantly lag the back book. The Fed is taking an increasingly aggressive stance to tackle inflation. Its last increase of 75 bp was the largest one-time hike since 1994. As the Fed passes 2.00% and potentially 3.00% this year, maintaining customer rates of 10 bp or less will surely draw attention from customers, bankers and maybe even regulators. That is vastly different from the early part of the last cycle when banks were able to manage commercial rates through exception pricing and consumer rates through occasional promotions.

We expect broad-based rate sensitivity to return to commercial portfolios faster than consumer portfolios. Indeed, there has already been a material uptick in 2022 year-end commercial beta forecasts since the first quarter of the year. (See Figure 2.)

Retail portfolios will also begin to come under some pressure later this year, especially as consumer awareness grows. Competition from fintechs and other online players are likely to lead the way on higher rates for the entire industry.

Figure 2: Commercial Deposit Beta Expectations for 2022 (as of June 2022)

Source: Responses from Commercial Deposit Product Managers, Curinos CDA


The next set of factors adding complexity to this cycle are unprecedented levels of excess liquidity and anticipated quantitative tightening that is being undertaken by central banks around the world. In the U.S., the massive fiscal and monetary stimulus unleashed by Congress and the Fed between March 2020 and December 2021 resulted in more than $3.5 trillion in deposits over the normal run rate of growth, according to a Curinos analysis.

Meanwhile, bank assets grew at a moderate pace in consumer businesses. Commercial loan growth turned flat to negative after an initial pop from emergency credit line drawdowns and the first round of PPP originations. That commercial loan growth has rebounded more recently, but consumer lending faces new headwinds as inflation raises prices on everything from gas to food. As a result, U.S. loan-to-deposit ratios have fallen to the mid-60% range from a long-term average in the mid-80s. (See Figure 3.)

The same trends apply in other parts of the world, prompting global officials to rein in the flood of liquidity that has entered the system. The Fed is ramping up to a forecasted pace of $95 billion a month in quantitative tightening, leading Curinos to now anticipate flat to slightly negative deposit growth over the next two-to-three years. In the last U.S. cycle of quantitative tightening (2017-2019), deposit balances grew modestly as the upward support to money supply from credit extension outpaced the reduction in money supply. But the Fed at that time was reducing its balance sheet more gradually than the current pace.

Quantitative tightening is also under way in England, where the central bank is pulling 28 billion pounds ($37 billion) off its balance sheet, and Canada, where the government is no longer replacing bonds that mature.

Figure 3: Total Bank Median Loan-to-Deposit Ratios

Source: Curinos CDA; S&P Global Market Intelligence


Skyrocketing inflation creates additional uncertainty, raising the potential of recession. Given the excess liquidity on bank balance sheets, this would be a manageable dynamic if the balance outflows were evenly distributed across banks. But they won’t be. Some banks, including those that acquired a larger share of surge deposits from non-primary customers, will see much faster outflows. Those banks will have to compete for deposits on price sooner than others, which will create additional dislocations in the deposit market and create general upward pressure on deposit betas.

Digital disrupters present even more complexity in this cycle. Direct banks were important in the previous cycle, but significant segments of the population resisted online banking and traditional bank promo rates largely kept pace with direct bank competitors. It’s a different story today. Consumers are much more aware and comfortable with digital banking; the pandemic has only accelerated this shift.

Still, digital and direct players typically don’t hold primary checking accounts and so they didn’t experience the same surge in balances as their traditional counterparts. As such, they are already retuning to a posture of aggressive price-driven acquisition. U.S. online bank savings rates increased by more than 25 bp through the end of May compared with no increase in traditional banks, according to Curinos data.

Likewise, for the smallest commercial customers, betas were much lower than other commercial segments in the prior cycle. But with more fintechs competing for wallet share, digital disruption will likely flow through to this segment as well, placing continued upward pressure on betas.

Then & Now

Source: Curinos analysis


Lastly, sanctions and energy market disruptions from the war in Ukraine, combined with ongoing supply-chain problems tied to COVID-19, mean we’re living through a time of nearly unprecedented market uncertainty. Tight labor market conditions and an ongoing process of determining new work and life routines create additional challenges and drivers of both local and macro uncertainty. In short, relative to prior cycles, there is a broader range of potential market conditions that can change quickly and without much warning.


Putting this all together, there are strategies that banks must follow to prepare and succeed in this challenging market.

First, reinforce the fundamentals of primary client acquisition and retention. Non-primary relationships, balances and volumes are always the first to move. Reinforcing comprehensive financial relationships that hinge on cash flow through the primary checking account is fundamental to predictability and profitability in consumer and commercial portfolios. Banks that are most successful will systematically measure relationship primacy on both an absolute and potential basis and integrate these measures into relationship pricing.

Second, data and analytics are critical. Timely and granular competitive data are helpful in all cycles, but more so in this cycle than any before. Rates and balances are going to move quickly and varying surge dynamics are creating competitive asymmetry. Data will inform decision makers about market dynamics, but it is also critical to have a finger on the pulse of your own book. Analytical insights enable decision making at pace and scale.

Finally, planning and forecasting are key. There’s an old adage “a plan beats no plan.” Well, in this cycle we would update that to “many plans beat one plan.” With so many drivers of market uncertainty, it’s critical to pre-plan for alternative scenarios so you can shift course quickly. The best scenario planning integrates macro factors with bottom-up analysis at the customer level and takes into account relationship primacy in balance and beta forecasts.

This is a highly complex period and one that will surely produce winners and losers. But by following the success factors outlined here, we believe any bank can win during and after this cycle.

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