The fight for deposits prompts loan pricing squeeze
Competition for deposits is influencing pricing decisions on commercial loans. However, the major cash-management banks insist that they have maintained both deposit levels and lending rates.
Data from the latest Greenwich commercial lending market insight report for North America shows that competition for deposits is influencing pricing decisions. Secured overnight financing rate (Sofr) spreads on floating rate commercial loans in the second quarter of 2023 were shown to be at their lowest level since the start of last year.
US bank deposits have declined in each of the last five quarters since the Federal Reserve began increasing interest rates, with losses spiking during the regional banking crisis earlier this year. There has also been a decline in the percentage of borrowers facing higher prices following a risk upgrade.
“The emphasis on building strong overall relationships with commercial clients – which includes loans, deposits and treasury management services – has led to some banks discounting credit offerings,” notes Gregory Schneider, director of commercial loan analytics at Coalition Greenwich.
During 2023, there has been a continued reduction in operating cash levels and active management of surplus cash to optimise returns, including reducing debt levels
In the UK, the Bank of England’s credit conditions survey found that spreads on lending to small businesses narrowed in the third quarter of 2023 and were unchanged for medium-sized and large businesses.