Is This Time Different: How Are Banks Performing during the Recent Interest Rate Increases Compared to 2004-2006?

What it says

Board economists compare how the largest US banks, those subject to Fed stress tests, fared in the 2022 tightening cycle against the 2004 to 2006 cycle. The starting point is that higher rates usually help net interest income, because many loans reprice and banks pass only part of each increase to depositors. The 2022 cycle was larger and faster, and banks entered it holding far more securities, partly because of liquidity rules and the Fed's asset purchases. Even so, asset yields rose by more than funding costs and loans grew solidly, so profitability of rate-sensitive business improved. The differences sit on the funding side. Aggregate deposit pass-through was more muted than in 2004, but more varied from bank to bank, while borrowed money and trading liabilities repriced much faster. Noninterest-bearing deposits fell as a share of funding as savers chased returns.

What to take from it

1. 1

   Net interest margin is interest income less interest expense, divided by average interest-earning assets; credit card banks run high margins, custody and investment banks low ones.

2. 2

   The sample covers 27 stress-tested banks holding 78 percent of FR Y-9C assets at the end of 2022.

3. 3

   Securities were 23 percent of assets entering the 2022 cycle and fell to 20 percent, versus 16 to 13 percent in 2004.

4. 4

   Noninterest-bearing domestic deposits dropped from 18 to 14 percent of funding in the 2022 cycle, against 11 to 10 percent in 2004.

5. 5

   Deposit betas, the change in deposit rates over the change in the funds rate, were lower at the larger banks in 2022.

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