The continued spread of COVID-19 has resulted in supply chain disruption, travel restrictions, and an overall chilling of markets all over the world. While the impact has been primarily limited to specific economic sectors such as the travel industry, we are now seeing major events canceled and corporations across the world asking employees to work remotely.
In an attempt to buoy demand and stave off sustained market losses, the US Federal Reserve Board decided, on March 3, to decrease key benchmark interest rates by 50 basis points.
This global emergency puts banks’ pricing operations under considerable strain while they figure out how to adapt in an agile manner to the new environment – both in terms of federal regulations, and internal benchmarks. They need to make sure that pricing remains aligned with institutional goals throughout the bank, while the regulatory environment and customer behavior are taking a dramatic and unpredictable turn.
It’s during global emergencies like this that the need for a unified, flexible, fast speed-to-market system governing the pricing operation of the whole bank becomes apparent and an unavoidable next step of the institutional roadmap.
Notably, the Fed’s decision was taken outside of the regulator’s schedule, ahead of normal meetings taking place in two weeks. While this may indeed have the desired effect of increased consumer borrowing, increasing the sale of mortgage and auto loans, and lowering rates on credit cards, it also changes the landscape for deposit products.
Currently, deposit rates for liquid accounts and short-term CDs are hovering around 150-200 basis points. While banks may not pass the entire 50bp cut on to their deposit customers, even a smaller reduction would be bad news for savers, encouraging them to seek out alternative investments. Banks must balance their desire to maintain deposit levels and low cost-of-funds as customers seek to stabilize returns on their savings.
On both sides of the equation, it is critical that banks ensure their pricing – for both lending and deposits – remains aligned with this dramatic shift in Treasury rates. Likewise, given the scheduled meetings concluding March 18, it is exceedingly likely that this is not the last rate change we will see this month. Banks must remain both focused and nimble in order to stabilize their business and optimize their profitability amidst this economic uncertainty.