What to Do Now? Trying to Make Sense of Fluctuating Interest Rates
Date: March 2, 2016
Just when the economic forces appear to be slightly clearer and somewhat more predictable, menacing clouds appear on the horizon. Even with all the historical and trend analyses about financial market behavior in a “traditional” rising rate environment, the markets are making statements of their own.
In the aftermath of the Fed’s raising of the benchmark federal funds rate in December, the market is still uncertain and jittery. Interest rates continue to fluctuate (although in a narrow range, and mostly down). In the meantime, low interest rates continue to squeeze net interest margins at financial institutions and to act as headwinds for those trying to meet net interest income goals.
All of this is occurring while capital is needed for a wide variety of duties, including compliance with stress test requirements and increasingly stringent regulatory dictates, alignment with liquidity and capital ratios, as well as investing in needed customer-centric projects.
Further complicating the picture for financial institutions is the possibility, albeit slim, for unprecedented negative interest rates in the United States. Conventional economic theory has long held that zero percent interest rates were the floor when considering monetary strategy, but this is already happening in Japan and some European markets, particularly with commercial banks’ excess funds. It’s possible that there will be similar discussions in retail banking, particularly in wealth management, where larger deposit balances are seen. Economists are closely watching the effects of these actions. If a negative interest rate scenario were to be more widely adopted, it’s unclear what the full effects on savings and lending would be.
In the meantime, banks and credit unions must move past interest rate concerns and continue to focus on tasks for which they have control, such as driving drive organizational improvements. With this mindset, financial institutions can devise ways to meet (and hopefully exceed) the needs of their customers and members. They must find ways to be more efficient while also improving organizational effectiveness and providing an outstanding customer experience.
In many cases, one of the more promising ways forward is in designing a truly efficient branch network augmented by highly effective digital channels and contact centers. Such banking channel investments can deliver benefits directly impacting the bottom line.
These improved channel efficiencies can offer opportunities for increased revenues, reduced total costs, or both. For many FIs, the expanded use of integrated channels systems that include some mixture of self-assisted-and full-service channels options can fit the bill. A focus on leveraging new processes and technologies offers much promise – with the added incentive of being under direct FI control, thereby delivering predictable results.