This Month’s Chart Deck

Key takeaways from Q1 2025 bank earnings results that would describe the situation in which almost every bank treasurers find themselves today include good news on the net interest margin (NIMs) front (Slide 1). While NIMs at the largest banks stabilized as deposit funding cost pressures leveled off, NIMs at smaller regional banks increased. The bad news is that negative fair value impairment on bank investment portfolios, including both available-for-sale (AFS) and held-to-maturity (HTM), deteriorated in Q1 2025 as bond yields climbed in response to inflation worries and tariff uncertainty (Slide 2). Uncertain which way interest rates and the economy are going, bank treasurers are increasing the hedging of the balance sheet, primarily through receive fixed derivatives. Bank treasurers, and other managers at REITs, mortgage-Servicing, and hedge funds drove a surge in open contracts of the Eris SOFR Swap futures (Slide 3) this month as risk managers seek interest rate protection and maintain their interest rate sensitivity.

Meanwhile, credit risk in bank loan portfolios continue to rise but remains low historically (Slide 4). In addition, home prices continued to increase this year, a sign of financial health for homeowners (Slide 5). Two banks failed in 2024, which cost the FDIC insurance fund less than $1 million, compared to five banks that failed in 2023 (including Silicon Valley Bank, Signature Bank, and First Republic), which cost it $19 billion (Slide 6). The FDIC, along with the Fed and the OCC, plan to pare back headcount by 10% in the next couple of years, in line with the new Administration’s push on government efficiency and despite concerns that exam functions are already understaffed and challenged to hire to fill empty positions. Combined, the headcount at the three agencies equaled more than 30,000 last year, two-thirds of which is staffing at the Fed (Slide 7).

Three years after the Fed began to shrink its System Open Market Account portfolio under Quantitative Tightening, its balance sheet is down by $2.2 trillion, to $6.7 trillion. Its monthly average balance of reserve deposits remains unchanged at $3.3 trillion. Based on the Fed’s study of reserve demand elasticity, the sensitivity of the Fed funds rate to changes in the level of reserves, sensitivity is virtually zero, which the Fed interprets to mean that reserves remain abundant in the system and that the risk of a sudden shortfall as happened in September 2019 in SOFR is negligible (Slide 8).

Cash is king, and everyone wants it to have and hold in times of uncertainty. Bank treasurers are not the only ones flocking to cash as a source of liquidity and safety against unforeseen circumstances; The average consumer still holds more cash on hand today than held before Covid (Slide 9), even though credit cards continue to dominate payments because more and more commerce occurs over an app than in-store. Of course, to have a credit card means having a checking account. According to the Atlanta Fed’s survey of consumer payment preferences, the number one reason why someone would not have a checking account is because they do not like dealing with banks (Slide 10), more so than complaints about fees or that the bank card issuer does not have branches conveniently located.