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Rising rates aren’t the salvation US banks were looking for

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After years at zero, rapid Fed hikes last year led to sharp increases in NII and NIM at US banks. But it is not all good news. Deposit betas are rising, the banks’ own AOCI bond portfolios are underwater – complicating their liquidity positions – and 2023 threatens to bring a recession that could hit asset quality.

On the face of it, 2022 was a great year for US banks. The Federal Reserve’s rapid hiking cycle fed into a banking system awash with liquidity: a mix of quantitative easing and fiscal stimulus that had left banks with swollen deposit bases. The parallel impact of all this liquidity was weak demand for credit, and some banks were put in the unusual position of actively declining additional deposits.

Then in the second half of the year came a tightening of monetary policy, and the banks suddenly found these deposits generating some real net interest income (NII). With still no competition for deposits, margins spiked, too.

In the third quarter, US banks' net income jumped “at the highest growth rate in over 40 years”, according to Mike Mayo, financial institutions analyst at Wells Fargo.

For example, JPMorgan reported a 34% jump in NII on an annual basis in the third quarter of 2022 – up to $17.6

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Latin America editor
Rob Dwyer is Latin America editor. He has been a financial journalist since 1997 and has worked in London, New York and São Paulo, Brazil, where he is now based.