Pub. 9 2018 Issue 2

www.wvbankers.org 18 West Virginia Banker A s we move through the year, it’s important for bankers to take note of some positive differences from twelve months ago. For example, we have new leadership at the Federal Reserve, including a chairman and vice chairman who are more supportive of regulatory relief for smaller banks. The US economy also comes into the new year with greater momentum and potential for faster growth on the heels of recently passed tax reform. As for the banking system, loan demand is healthy, cost-of-funds remains low, asset quality is solid, and we have stronger capital positions than we’ve had in years. The bottom line is that banks are producing the best returns for the industry since the last recession began ten years ago. All of this is decidedly good news. Still, we must keep our eye on potential risks lurking in the current environment. Liquidity, for example, is much tighter than it has been, and pricing power on loans is weak due to competition for good credit. The Fed Funds rate is 75 percent above its year-ago level, but earning asset yields are sticky at lower levels and the yield curve is flatter than it’s been in eight years. It should also be borne in mind that the economic cycle itself is getting old. Though it has been weak, this recovery has also been quite lengthy by historical standards and may be due for a setback. Not necessarily another “great recession,” but a cleansing pullback at least. Remember, the Hindsight, Foresight, and Insight: Market Conditions in 2018 The Fed Funds rate is 75 percent above its year-ago level, but earning asset yields are sticky at lower levels and the yield curve is flatter than it’s been in eight years. It should also be borne in mind that the economic cycle itself is getting old. Though it has been weak, this recovery has also been quite lengthy by historical standards and may be due for a setback. By Jeffrey F. Caughron, Managing Director, The Baker Group