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FDIC QUARTERLY | OCTOBER 19, 2023 |
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FDIC Quarterly Report Compares Bank Performance in the Recent Interest Rate-Hike Cycle to 2004-2006
Interest rates rose dramatically in 2022, causing an abrupt shift in banking conditions. The increase in the federal funds target rate in 2022 was the largest and fastest since the 1980s and followed an extended period of low interest rates. Intermediate and longer-term rates also rose but at a slower pace, causing the yield curve to rise and invert. Interest rates affect banks through earnings, lending, funding costs, and the fair value of assets. The FDIC report “Banking Sector Performance During Two Periods of Sharply Higher Interest Rates: 2022 and 2004 to 2006” examines the increase in interest rates in 2022 and compares the resulting changes in banking outcomes with changes that occurred during 2004 to 2006 (2004 cycle), when interest rates rose by nearly the same magnitude.
The FDIC report finds that:
- While the effects of higher interest rates on banking outcomes generally followed a similar pattern between the two cycles, the effects have been somewhat more pronounced in the 2022 cycle.
- In 2022, higher interest rates boosted net interest income but banks eventually encountered decelerating loan growth, lower deposits, and increased funding costs by first quarter 2023.
- Banks benefited from higher rates in the 2004 cycle, but to a smaller degree, and were also challenged by decelerating loan growth and deposits, and eventually reduced profitability.
- The sharply higher interest rates in 2022 strained certain banks, as highlighted by severe liquidity strains and the bank failures in March and May of 2023. Banks encountered liquidity pressures during the 2004 cycle but to a smaller degree.
- Banks also reported very large declines in securities values in 2022, the largest declines in decades. The securities value declines during the 2004 cycle were much more modest.
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