ALM First NMD chart Source: S&P Global, ALM First

Rising interest rates have reoriented attention on depository funding needs and continue to threaten access to cost-efficient sources of funding. As of March 31, 2023, commercial banks with $1-50 billion in assets have seen accelerated deposit outflows relative to a year ago. Credit unions, while more stable, have also seen a slowdown. Figure 1 (above) shows a systemic rise in non-maturity deposits (NMDs) for commercial banks to the point where they have converged with credit unions. However, both credit unions and banks have seen a substantial shift in funding composition from NMDs to term and wholesale funding sources, with most of the wholesale funding being less than one-year maturity. This shift can cause margin pressure and an increase in interest rate risk exposure for institutions without a funding strategy in place. By using hedging techniques, depository institutions can lower their all-in cost of funds while still using short-term wholesale funding sources and targeting an interest rate risk (IRR) profile similar to a longer-term borrowing.

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