Pub. 7 2017 Issue 1

10 www.azbankers.org The Environment for Bank Funding and Deposits in 2017 BY Reg Truman, REGIONAL DIRECTOR, PROMONTORY INTERFINANCIAL NETWORK W HEN IT COMES TO FUNDING AND DEPOSITS, BANKERS ARE IN A SIMILAR POSITION TO WHERE THEY WERE 12 MONTHS AGO. THE FEDERAL RESERVE DECIDED TO RAISE INTEREST RATES AT THE END OF 2016 JUST AS IT DID AT THE END OF 2015, AND NOW BANKERS FACE THE QUESTION OF WHAT THE FUNDING FUTURE LOOKS LIKE. According to the early November results from Promontory Interfi - nancial Network’s Bank Executive Business Outlook Survey — a quarterly survey that captures the expectations of bank CEOs, CFOs, and presidents on a range of economic and industry subjects — most bank leaders expect to see moderate growth in funding costs over the next year. Despite the possibility that an increase in interest rates could impact bank net interest margins, bankers awaited the interest rate increase at the end of 2016 with some enthusiasm, just as they did at the end of 2015. One reason for the general enthusiasm is that banks have been pre - paring for this for a while. Concerns about interest rate risk appear to be a thing of the past. The general expectation by bankers for an in - crease in funding costs has been consistent for more than 18 months, and bankers have been positioning their funding portfolios to dull the margin impact of a rise in rates accordingly. Asked to assess current and target funding durations, survey respondents indicated little difference between the expected duration of current funding sources and the duration of the funding that they are targeting going forward. Now, with rates moving once again, what is the impact that banks can expect to see? Even the single rate increase at the end of 2015 led many bankers to experience a notable shift in the cost of their banks’ funding in 2016. Nearly 40 percent of bankers who responded to the Bank Executive Business Outlook Survey in November 2016 reported that they had