The Impact of a Flatter Yield Curve on Liquidity and Spread

By: Jim Craven

Loan growth is improving. Deposit costs are higher. Liquidity is tight. These are common phrases we hear daily. Large and small financial institutions across the country are simultaneously dealing with all three. This is a recent phenomenon, which has accelerated over the past several quarters. It all started slowly as the Federal Reserve began raising short-term interest rates in response to an improving economy. Loans began to grow slowly, then came on strong more recently. Short-term interest rates have increased faster than long-term rates, and the yield curve is very flat. Over the long term, a flatter yield curve is not favorable for financial institution earnings. Impressive loan growth has caused a fierce battle for core deposits, resulting in higher funding costs and liquidity stress.



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