Bank Director’s 2023 Risk Survey, sponsored by Moss Adams LLP, finds interest rates and liquidity risk dominating bank leaders’ minds in 2023.
The survey, which explores several key risk areas, was conducted in January, before a run on deposits imperiled several institutions, including $209 billion SVB Financial Corp., which regulators closed in March. Bank executives and board members were feeling pressure on deposit costs well before that turmoil, as the Federal Open Market Committee raised the federal funds rate through 2022 and into 2023.
Over the past year, respondent concerns about interest rate risk (91%), credit risk (77%) and liquidity (71%) all increased markedly. Executives and directors also identify cybersecurity and compliance as areas where their concerns have increased, but managing the balance sheet has become, by and large, their first priority.
Bank leaders name deposit pricing as the top strategic challenge their organization faces in 2023, and a majority say their bank has experienced some deposit loss, with minimal to significant impacts on their funding base. Most respondents say their No. 1 liquidity management strategy would be to raise the rates they pay on deposits, followed by increasing their borrowings from a Federal Home Loan Bank.
While SVB operated a unique business model that featured a high level of uninsured deposits and a pronounced concentration in the tech industry, many banks are facing tension as deposits reprice faster than the loans on their books.
Net interest margins improved for a majority of bank leaders taking part in the survey, but respondents are mixed about whether their bank’s NIM will expand or contract over 2023.
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Asked about what steps they might take to manage liquidity, 73% of executives and directors say they would raise interest rates offered on deposits, and 62% say they would borrow funds from a Federal Home Loan Bank. Less favored options include raising brokered deposits (30%), the use of participation loans (28%), tightening credit standards (22%) and using incentives to entice depositors (20%). Respondents say they would be comfortable maintaining a median loan-to-deposit ratio of 70% at the low end and 90% at the high end.
Strategic Challenges Vary
While the majority of respondents identify deposit pricing and/or talent retention as significant strategic challenges, 31% cite slowing credit demand, followed by liquidity management (29%), evolving regulatory and compliance requirements (28%) and CEO or senior management succession (20%).
Continued Vigilance on Cybersecurity
Eighty-seven percent of respondents say their bank has completed a cybersecurity assessment, with most banks using the tool offered by the Federal Financial Institutions Examination Council. Respondents cite detection technology, training for bank staff and internal communications as the most common areas where they have made changes after completing their assessment. Respondents report a median of $250,000 budgeted for cybersecurity-related expenses.
Stress On Fees
A little over a third (36%) of respondents say their bank has adjusted its fee structure in anticipation of regulatory pressure, while a minority (8%) did so in response to direct prodding by regulators. More than half of banks over $10 billion in assets say they adjusted their fee structure, either in response to direct regulatory pressure or anticipated regulatory pressure.
Climate Discussions Pick Up
The proportion of bank leaders who say their board discusses climate change at least annually increased over the past year to 21%, from 16% in 2022. Sixty-one percent of respondents say they do not focus on environmental, social and governance issues in a comprehensive manner, but the proportion of public banks that disclose their progress on ESG goals grew to 15%, from 10% last year.
Stress Testing Adjustments
Just over three-quarters of respondents say their bank conducts an annual stress test. In comments, offered before the Federal Reserve added a new component to its stress testing for the largest banks, many bank leaders described the ways that they’ve changed their approach to stress testing in anticipation of a downturn. One respondent described adding a liquidity stress test in response to increased deposit pricing and unrealized losses in the securities portfolio.