Connecting the dots is an age-old pastime, but the dots that bank treasurers see these days are very confusing and challenging to connect, at least without some form of AI. Even the voting members of the FOMC are not sure what picture they see. Amid significant market volatility and economic uncertainty, bank treasurers are just trying to keep their eyes on the horizon and keep their net interest margins steady.

It has been two and a half years since the regional bank failures, and Congress has not done anything to fix deposit insurance. The FDIC published a report on May 1, 2023, detailing the options before Congress for deposit insurance reform, but none of the choices are without tough tradeoffs. The public wants higher deposit insurance coverage, but that choice means banks will pay higher deposit insurance premiums, and higher premiums mean less profit. Congress needs to vote, and its vote is overdue. The last time Congress voted on deposit insurance to increase the cap to $250,000 was fifteen years ago.

Bank treasurers remain wary of stablecoins, but there is good news and bad news. First, the bad news is that instant payment systems, where volumes are growing by leaps and bounds and which stablecoins are one type, are going to increase the mix of low-yielding HQLA that banks will need to hold on their balance sheets, to the detriment of their NIMs. The good news is that first, no one in their right mind sits in cash, so the risk to deposits seems overdone. But the even better news is that global cross-border payment flows neared $1 quadrillion last year, and the average size of a single payment is often over $50 million, well beyond what other instant payment methods like FedNow and RTP typically handle, and thus an excellent use case for stablecoins. The beauty of these coins from an issuer’s perspective is that they are managed off-balance sheet by a third party, while the issuer earns 100% of the interest generated from the assets it places in the reserve fund until the holder cashes the token.

Bank treasurers may not like accounting, but they know that debits and credits always matter in a financial transaction. That is why it does not take a GENIUS Act to appreciate the economic opportunities Congress gave the financial industry this month. Instead, it requires accounting and an understanding of how debits and credits work in its favor. Basic accounting common sense also helps explain why the Fed can never return to the balance sheet it once had before the GFC and can never revert to the days when the law prohibited it from paying IORB, despite political calls to the contrary.

Bank examiners, as depicted in the 1946 movie, “It’s a Wonderful Life,” are a rare breed of smart, dedicated public servants whose job has always been to keep the financial system safe and sound. As the complexity and risks of running a bank increase with the introduction of cryptocurrencies such as stablecoins and the move towards tokenization, the need for these examiners has never been greater. Yet, bank supervisors are leading a reduction-in-force that will further strain resources.

May was another month of uncertainty and market volatility, which continues a trend that bank treasurers have seen for longer than they can remember. In challenging times like these, bank treasurers prefer to sit in the bunker, holding cash, which is nothing different from what they have been doing for years. Hedging for rates down but unsure if they should be worrying about a rate-up scenario, bank treasurers take no comfort in the fact that Fed officials also continue to express uncertainty about the economic picture and the likely path for rates.

The earnings outlook for banks is encouraging just judging by Q1 2025 results, but the industry’s message to investors this month was that anything can happen and the rest of the year and all the key performance indicators they track are just too hard to predict. Bank treasurers continue to face a challenging landscape to navigate and a lot of risk they need to manage. They are sitting on a lot of cash waiting for clarity, but they are also studying the capabilities of the latest AI technology to improve their decision-making capabilities.

The banking industry continues to ramp up investment in GenAI and machine learning technology. While AI probably will never replace humans as the ultimate decision-makers, it offers to help them make better, more informed decisions. This month, the newsletter’s editorial staff decided to test out the state of this technology and created Jay AI, our very own Jerome Powell bot. The editor-in-chief posed key questions to see what it would answer on topics that bank treasurers have on their minds about interest rates and the economy, the future of bank supervision, and the direction of the Fed’s balance sheet.

Zeno was a Greek philosopher who lived 2,500 years ago and argued that no matter how far one goes in any one direction, no one gets anywhere. Distances and speed are an illusion as he views the world. If alive today to advise bank treasurers, he would advocate long-term buy-and-hold strategies. Likely, Zeno would have been no fan of short-term, relative value trade ideas and legacy asset restructuring proposals, believing they did not create shareholder value. His advice would be, as difficult as it is for bank treasurers, given the significant unrealized losses on their balance sheets, to sit with low-yielding assets below their marginal cost of funds and let them run off rather than pursue short-term fixes that still leave them no better off in the long run.

The Fed’s conduct of monetary policy has been very wanting lately, given that its rate cuts last fall caused the 10-year Treasury to sell off and made bank treasurers wonder whether the Fed has a handle on interest rates or the economy. Even though bank treasurers appreciate a normal sloped yield curve, this was the first time in 40 years when the Fed’s rate cuts caused the yield curve to bear steepen. Not only are treasurers saddled with negative AOCI, but they are also earning 100 basis points less on their cash pile at the Fed.