Market expectations now favor increasing interest rates and thus expectations around deposit cost pressures have changed. Many banks were hoping for continuing rate decreases to continue relieving funding cost pressures. With the market now expecting the Federal Reserve to increase the Federal Funds rate in the second half of 2026, this means that funding costs will stay flat for the moment and then rise with both rate increases and competitive pressures. If rates increase that means loan rates will increase and thus banks should be able to maintain net interest margin (NIM), however if loan demand decreases due to increased interest rates (loans become less affordable) then margins could compress with higher funding costs. This episode examined a series of articles from S&amp;P Global Market Intelligence (subscription required).

Will increasing funding costs squeeze bank deposits?

The Banker Next Door

How's everyone doing today? Welcome back to another episode of The Banker Next Door. I am your host, Dr. Joe Bergquist. So today we're going to be taking a look at funding costs, i.e. otherwise the cost of deposits. Deposits being the lifeblood of any bank out there. Banks need deposits in order to be able to lend out money. But banks also need to be able to create a spread. They have to have the spread in order to be able to create profitability for the bank.

Like in other words, if you're going to make a loan at 6%, you probably want to have your funding costs be at 3% or below. So you could create at least a 3% spread between what you're lending at and what you're paying out to customers on deposits. Okay, this is very keeping this spread at usually that 2.5% to 3% or even better than 3%. That is key to a bank maintaining its profitability.

So with that being said, I have a series of articles here today from S&P Global Market Intelligence that I wanted to share to everybody. The first couple ones are basically focusing on like this article right here says, Rate shift puts focus on deposit costs, net interest income, and second quarter bank earnings. So we're going to take a look at a couple articles here, really focusing in on this expectant shift in rates here.

And I'm going to give you a couple of examples already of what some of the banks out there are doing to try to basically prepare for this. So what is this article? This first article says right here that market expectations of rate hikes this year put deposit cost pressures in the spotlight for upcoming earnings reports.

Will increasing funding costs squeeze bank deposits?

Read the full transcript

The candid version is on a podcast,
not the earnings call.

Will increasing funding costs squeeze bank deposits?

Read the full transcript

The candid version is on a podcast, not the earnings call.

The candid version is on a podcast,
not the earnings call.