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KBRA Analytics Releases The Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk
[January 25, 2023]

KBRA Analytics Releases The Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk

KBRA Analytics releases this month's edition of The Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk.

This month's newsletter, Bank Treasurers Have Questions for Ben A.I., presents a conflicting picture of the state of bank deposits and how the developing interest rate cycle will impact this critical source of balance sheet funding. For example, H.8 data show that deposits continued to drain out of the banking system in Q4 2022, but at a slower pace than in Q3 2022, as the Federal Reserve continued to hike rates. Further, management reported this month that deposit repricing beta is still increasing, but also at a slower pace compared to the previous quarter. The newsletter also reviews anecdotal evidence that suggests community banks are becoming more aggressive at pricing deposits, while data from the Fed's Discount Window points to potential liquidity stresses in that group.

Notably, despite the Fed's ample reserve policy, market conditions may be tighter than implied by the fed funds rate thanks to forward guidance and quantitative tightening, based on a review of a San Francisco Fed study. The report also discusses the implications for net interest margins (NIM) that most of the deposit outflows are coming from demand deposit accounts (DDA). DDAs were not as profitable for banks back when the Fed was keeping rates at the zero lower bound, but today, with the effective fed funds rate at 4.3% and expected to go higher, the remixing of deposit balances from noninterest- to interest-bearing deposits is adding downward pressure on NIMs. Bank management credits strong interest-earning asset growth for offsetting those pressures and driving net interest income (NII) growth in Q4 2022.

Current expected credit loss (CECL) is the focus of this month's Bank Treasury Newsletter Chart Deck, which examines why the banking industry has yet to increase its reserve coverage-on a relative basis to total loans and leases and other credit exposure on the balance sheet-on the heels of a possible recession. Having adopted the new accounting standard with the objective of accruing creditloss earlier than was the standard during the global financial crisis, the chart deck highlights how economic indicators and financial metrics other than those that include the reserve, appear to support the current level of credit reserves. Indeed, the current level of credit coverage is a reflection of the quality of bank underwriting which is much improved since the crisis, and which produces loans that, when ultimately some of them default, result in lower losses.

This issue of Bank Talk compares the structure, sensitivity, and maturity profile of the Fed's System Open Market Account (SOMA) portfolio of Treasurys and MBS to the average bank portfolio. This month, Van asks Ethan to estimate the size of the mark-to-market hit to the Fed's SOMA portfolio, given the rate hikes last year and assuming the Fed adhered to generally accepted accounting principles (GAAP)-which it does not-and how that compares to the size of the hit for a bank's bond portfolio. Ethan demonstrates to Van why the Fed's balance sheet is fundamentally liability-sensitive, reviewing the Fed's income statement and showing him how the structure of the balance sheet (with other liabilities including currency in circulation) plays out in the remittance that the Fed pays to the Treasury. Finally, Ethan compares the book yield on the average bank bond portfolio to the yield on the SOMA portfolio and discusses with Van how the spread between the two portfolios has changed since the Fed began hiking interest rates last year.

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About KBRA Analytics
KBRA Analytics, LLC (KBRA Analytics) is our premier product platform for high quality data and advanced analytics. Our seasoned teams of industry specialists across each product provide unparalleled insight creating a foundation of deeper analysis and rapid discovery for users. KBRA Analytics is an affiliate of Kroll Bond Rating Agency, LLC (KBRA). KBRA is a full-service credit rating agency registered in the U.S., designated to provide structured finance ratings in Canada, and with credit rating affiliates registered in the EU and UK.

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