Odd Lots
Josh Younger Explains How Banks Really Manage Rate Risk
Nov 30, 2023
Josh Younger, a senior advisor at the Federal Reserve Bank of New York and former JPMorgan researcher, dives deep into the intricacies of bank rate risk. He discusses why banks often hesitate to pass on interest rate hikes to customers and explores how depositors' behavior shifts in different economic climates. The conversation reveals the challenges banks face with duration risk and the stability of deposits, highlighting the delicate balance between maintaining depositor rights and ensuring effective lending strategies.
39:25
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Quick takeaways
- Deposits in banks tend to be sticky but their beta, or their movement in relation to market yields, increases as interest rates rise, affecting banks' ability to make fixed-rate loans and impacting credit allocation decisions.
- The mix of deposit types, including sticky retail deposits and wholesale deposits with higher betas, impacts a bank's funding cost and its ability to support long-term fixed-rate lending, emphasizing the importance of understanding deposit behavior for effective bank management.
Deep dives
The Impact of Non-Linear Deposit Betas on Banking
This podcast episode explores the non-linear relationship between interest rates and bank deposit betas. Deposits tend to be sticky, meaning people leave their money in banks for extended periods. However, as interest rates rise, the beta, or the degree to which deposit rates move in relation to market yields, increases. This non-linear relationship affects banks' ability to make long-term fixed-rate loans and influences the transmission of monetary policy. Higher deposit betas amplify the bank lending channel, impacting credit allocation decisions and duration capacity constraints. The research highlights the complexity of banking and the challenges in managing interest rate risk.
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