QUARTERLY 2023 VOLUME 17, NUMBER 3

45 

BANKING SECTOR PERFORMANCE DURING TWO 

PERIODS OF SHARPLY HIGHER INTEREST RATES: 

2022 AND 2004 TO 2006

OVERVIEW Interest rates rose dramatically in 2022, causing an abrupt shift in 

banking conditions. The increase in the federal funds target rate 

in 2022 was the largest and fastest since the 1980s and followed an 

extended period of low interest rates. Intermediate and longer-term 

rates also rose but at a slower pace, causing the yield curve to rise and 

invert. Interest rates affect banks through earnings, lending, funding 

costs, and the fair value of assets. This article examines the increase in 

interest rates in 2022 and compares the resulting changes in banking 

outcomes with changes that occurred during 2004 to 2006 (2004 cycle), 

when interest rates rose by nearly the same magnitude.

In 2022, banks benefited from an initial boost to net interest income 

provided by increasing interest rates, but challenges relative to 

decelerating loan growth, increased funding costs, and decreased 

liquidity became more evident by first quarter 2023. Banks benefited 

from higher rates in the 2004 cycle but to a smaller degree, and 

were also challenged by decelerating growth of loans and deposits 

and decreased fair value of assets and liquidity. While the effects 

of higher interest rates on banking outcomes generally followed a 

similar pattern in both cycles, the effects have been somewhat more 

pronounced in the current cycle, for reasons described in this article. 

The sharply higher interest rates in 2022 strained certain banks, as 

highlighted by severe liquidity strains and the bank failures in March 

and May of 2023.
QUARTERLY 2023 VOLUME 17, NUMBER 3

46 

INTEREST RATE DEVELOPMENTS After a prolonged period of historically low interest rates, interest rates 

rose dramatically in 2022. From March to December 2022, the Federal 

Open Market Committee (FOMC) raised the federal funds target rate 

425 basis points, the fastest pace of tightening since the early 1980s. 

Medium- and longer-term rates also rose. The ten-year Treasury yield 

rose from 1.63 percent to 3.88 percent in 2022. Short-term rates rose 

faster than longer-term rates, causing the yield curve to invert, with 

the two-year yield exceeding the ten-year yield by the widest margin 

since 1981.

The 2004 cycle was the most recent cycle with a relatively large 

increase in interest rates and offers a basis for comparing interest rate 

effects on bank performance over time. In the 2004 cycle, the federal 

funds target rate increased by a similar magnitude but more gradually, 

over a period of 24 months. Like the 2022 cycle, the 2004 cycle also 

followed a period of low interest rates.1 After the sharp increases in 

interest rates in the 2004 cycle, interest rates fell to historically low 

levels and the 2015 rate hike cycle that followed was lower and more 

gradual (Chart 1).

1 In July 2003, the effective federal funds rate declined to 1.01 percent, its lowest level in 45 years. In June 2003, the Federal Home Loan Mortgage Corporation 30-year 

conventional mortgage rate fell to 5.21 percent, the lowest rate up until June 2003 in the history of the Primary Mortgage Market Survey. See FDIC, Crisis and Response: An FDIC 

History, 2008–2013, November 30, 2017, https://www.fdic.gov/bank/historical/crisis/crisis-complete.pdf.

Interest Rates Rose More Sharply in 2022 Than in Previous Cycles

Change in Federal Funds Target Rate

Basis points

Source: Federal Reserve Board (Haver Analytics).

Note: Data as of July 2023. The cumulative change in the federal funds target rate is the di­erence between the rate at a given month

compared to the month before the rate hike. 

Number of Months Since the Initial Rate Hike

0

50

100

150

200

250

300

350

400

450

500

550

02468 10 12 14 16 18 20 22 24 26 28 30 32 34 36

1983

1987

1994

1999

2004

2015

2022

Chart 1
QUARTERLY 2023 VOLUME 17, NUMBER 3

47 

Higher interest rates affect bank loan growth, revenue, funding costs, 

deposit growth, and the fair value of assets.2 This article examines 

trends in these variables during two periods of rising rate cycles: the 

one that began in 2022, and the 2004 cycle, the rate hike cycle most 

comparable to 2022 in magnitude.3 Banking outcomes in the two 

periods were compared with outcomes in the year before, 2003 and 

2021. The analysis also includes comparisons to ten-year averages 

through 2021 to provide a longer-term comparison of the value of 

these variables during a period of lower interest rates.4 The trends 

reflect medians of the values banks reported in Consolidated Reports 

of Condition and Income (Call Reports), unless otherwise noted, to 

understand effects on a “typical” bank not captured in averages and to 

understand aggregates that are skewed by larger banks and outliers.

LOAN GROWTH Loan growth reflects a variety of factors, including economic 

conditions, interest rates, and bank underwriting standards. The 

relative importance of these factors, and the effects on loan supply and 

demand, are difficult to determine separately.5 Interest rate tightening 

cycles are generally a response to inflationary pressures that may 

be associated with especially strong economic conditions. Strong 

economic conditions are also generally supportive of loan growth and 

may contribute to loan growth even as interest rates begin to rise, at 

least initially. Eventually, higher interest rates tend to slow economic 

conditions and reduce loan affordability, which lowers demand for 

loans and leads to tighter underwriting standards that reduce the 

supply of loans.

2“Banks” are all FDIC-insured filers of Consolidated Reports of Condition and Income (Call Reports), both commercial banks and savings institutions.

3

 The federal funds target rate rose 425 basis points in 2022 and in the 2004 cycle.

4 Unless otherwise noted, balances or ratios are as of December 31 of each year. Banking outcomes expressed as year-over-year growth rates or changes for median banks are based 

on bank level data adjusted for mergers over the one-year period. Banking outcomes expressed as ratios for median banks do not need merger adjustment. Share counts include only 

banks that existed in both reporting periods. The ten-year average refers to the period 2012 to 2021.

5 Kenneth N. Kuttner and Patricia C. Mosser, “The Monetary Transmission Mechanism: Some Answers and Further Questions,” FRBNY Economic Policy Review, May 2002, 

https://www.newyorkfed.org/medialibrary/media/research/epr/02v08n1/0205kutt.pdf.
QUARTERLY 2023 VOLUME 17, NUMBER 3

48 

Loan growth was initially resilient during both periods of rising 

interest rates, even after adjusting for loans made under the Paycheck 

Protection Program (Chart 2).6 Despite the larger increase in shortterm interest rates, the median loan growth rate was significantly 

higher in 2022 than in 2021 and the ten-year average (Table 1). The 

median loan growth rate was 12.3 percent in 2022, the second-highest 

median loan growth rate since 1984. The 2022 median loan growth 

was more than double the median loan growth rate of 5.7 percent in 

2021 and the ten-year average median loan growth rate of 4.5 percent. 

All but the largest banks had higher median loan growth rates in 2022 

than in 2021, and only 10.0 percent of banks reported no loan growth 

in 2022.

6Total loans and commercial and industrial (C&I) loans exclude balances from the Paycheck Protection Program (PPP) which temporarily boosted loan growth. The PPP was 

implemented in 2020 and ended in 2021 and provided low-cost, forgivable loans to qualifying small businesses to help cover payroll costs, interest on mortgages, rent, and 

utilities during economic dislocation caused by the COVID-19 pandemic. Including PPP loan balances, the median total loan growth rate was 6.2 percent in 2020, 2.0 percent in 

2021, and 11.1 percent in 2022. Excluding PPP loan balances, the median total loan growth rate was 1.4 percent in 2020, 5.7 percent in 2021, and 12.3 percent in 2022.

Loan Growth Was Resilient During the 2004 to 2006 and 2022 

Rising Interest Rate Cycles

Percent

Source: FDIC.

Note: Data as of fourth quarter 2022. Total loans excludes balances from the Paycheck Protection Program. Growth rate is calculated

as the annual change in balance as of December 31 of each year. Median growth is adjusted for mergers.

Chart 2

-10

-5

0

5

10

15

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Aggregate Growth Rate

Median Growth Rate

Table 1

Loan Growth Strengthened During 2004 to 2006 and in 2022

Median Annual Total Loan Growth (Percent)

2003 2004 to 2006 2012 to 2021 2021 2022

Industry 5.3 8.4 4.5 5.7 12.3

Asset Size Groups

 Greater Than $250 Billion 5.1 7.9 3.7 7.5 6.8

 $10 Billion to $250 Billion 8.1 10.7 6.5 5.6 13.0

 $1 Billion to $10 Billion 8.3 11.8 7.5 8.3 15.6

 $100 Million to $1 Billion 7.1 9.9 4.8 6.1 12.4

 Less Than $100 Million 3.2 6.0 1.8 1.3 6.4

Source: FDIC.

Note: Total loans excludes balances from the Paycheck Protection Program. Growth rate is calculated as the annual change in balance as of December 31 of each year, adjusted for 

mergers. Simple average is calculated for multiple years.
QUARTERLY 2023 VOLUME 17, NUMBER 3

49 

Strong labor markets and high inflation in 2022 may have helped 

support loan growth. Despite an economic slowdown and higher 

interest rates in 2022, inflation continued to rise and reached multidecade highs. Higher prices for items that typically are financed by 

banks may increase the amount that the customer needs to borrow. 

The labor market remained strong and personal incomes continued to 

grow, even as other sectors of the economy such as housing began to 

slow. Loan growth remained strong over the year, even as loan demand 

started to weaken later in 2022, according to the Federal Reserve Senior 

Loan Officer Opinion Survey on Bank Lending Practices (loan officer 

survey).7

As the economy grew at a slower pace and the lagged effects of higher 

interest rates further dampened economic conditions, loan growth 

began to soften in 2023. In aggregate, loans grew 0.4 percent between 

fourth quarter 2022 and first quarter 2023, though loan growth was 

more resilient for the median bank.8 The slowdown in lending may 

reflect caution from banks.9 In the April 2023 loan officer survey, banks 

reported tightening lending standards and noted concerns about 

funding costs, liquidity positions, and deposit outflows as reasons for 

expecting to tighten lending standards over the rest of 2023.10

Similar to the 2022 rate hike cycle, loans grew during the initial stage 

of the 2004 cycle and then decelerated toward the end. Economic 

conditions strengthened in 2004 from the previous year, with stronger 

economic growth and a lower unemployment rate. With these strong 

economic conditions, median loan growth strengthened. Economic 

conditions and loan growth early in the 2004 cycle reflected a 

housing boom during the mid-2000s, characterized by rapid credit 

expansion. Lending conditions cooled as interest rates rose and the 

housing market began to slow as house prices, as measured by the S&P 

CoreLogic Case-Shiller Home Price Index, declined.11

7Board of Governors of the Federal Reserve System, October 2022 loan officer survey, November 7, 2022, https://www.federalreserve.gov/data/sloos/sloos-202210.htm.

8 This figure represents aggregate loan growth after adjusting for loans transferred out of the banking system to the FDIC resulting from two bank failures. See the FDIC Quarterly

vol. 17 no. 2 for more details, https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2023mar/qbp.pdf#page=1.

9 “Loan Growth Accelerates as Bankers Note Caution for Rest of 2022,” Federal Reserve Bank of San Francisco SF Fed Blog, October 6, 2022, https://www.frbsf.org/our-district/about/

sf-fed-blog/loan-growth-accelerates-bankers-note-caution-for-2022/.

10 Board of Governors of the Federal Reserve System, April 2023 loan officer survey, May 8, 2023, https://www.federalreserve.gov/data/sloos/sloos-202304.htm.

11 Home prices, as measured by the S&P CoreLogic Case-Shiller Home Price Index, peaked in July 2006 and then began to decline. S&P Dow Jones Indices LLC, S&P/Case-Shiller U.S. 

National Home Price Index, retrieved from FRED, Federal Reserve Bank of St. Louis, July 12, 2023, https://fred.stlouisfed.org/series/CSUSHPINSA; Board of Governors of the Federal 

Reserve System, “FOMC Statement,” press release, August 8, 2006, https://www.federalreserve.gov/newsevents/pressreleases/monetary20060808a.htm.
QUARTERLY 2023 VOLUME 17, NUMBER 3

50 

Loan growth varied by loan category during both interest rate cycles, 

and business loans demonstrated higher growth. In 2022, median loan 

growth in commercial and industrial (C&I) loans was higher than in 

other categories (Table 2). Median consumer loan growth was led by 

credit card lending despite higher interest rates as consumer spending 

grew, in part reflecting higher expenditures from high inflation. With 

the exception of agricultural loans, loan growth was robust across all 

major loan portfolios.

In contrast, median growth in consumer loans declined in the 2004 

cycle. High consumer debt burdens potentially weighed on consumer 

loan growth, which was much weaker during the 2004 cycle, while 

recovering business conditions early in 2004 may have helped C&I and 

nonfarm nonresidential lending.12 Holdings of 1–4 family residential 

mortgages grew despite the declines in mortgage markets in both 

periods (box on page 51).

12 Sally Kearney, “A Market Perspective on Banks’ 2004 Outlook,” FDIC, March 8, 2004, https://www.fdic.gov/news/events/roundtables/bioutlook_summary.html.

Table 2

While Business and Residential Real Estate Loans Led Growth in 2004 to 2006, Loan Growth Was Broad Based Across Industries in 2022

Median Annual Loan Growth Across Industry Loan Portfolios (Percent)

2003 2004 to 2006 2012 to 2021 2021 2022

Commercial and Industrial 5.1 8.1 3.9 7.0 13.1

1–4 Family Residential –0.5 4.9 2.0 1.4 12.7

Nonfarm Nonresidential 12.0 10.5 4.6 6.8 10.4

Agricultural –4.2 2.4 0.8 –3.6 0.4

Consumer –5.0 –1.1 –1.4 0.5 5.9

 Credit Card –1.3 0.0 –0.7 3.6 5.8

 Other Consumer –5.6 –1.4 –2.8 –2.9 3.9

Source: FDIC.

Note: Commercial and Industrial loans excludes balances from the Paycheck Protection Program. Growth rate is calculated as the annual change in balance as of December 31 of each 

year, adjusted for mergers. Simple average is calculated for multiple years.
QUARTERLY 2023 VOLUME 17, NUMBER 3

51 

HIGHER INTEREST RATES WEAKENED HOUSING MARKET CONDITIONS DURING BOTH CYCLES 

Housing is highly sensitive to interest rates, and higher interest rates slowed housing markets during both interest rate cycles. Mortgage 

rates rose substantially in 2022, with fixed-rate mortgages increasing more than market interest rates. According to the Federal Home 

Loan Mortgage Corporation, mortgage rates for 1–4 family homes more than doubled between 2021 and 2022 (Chart 3).

While mortgage interest rates were generally higher in 2004 than in early 2022, the increase during the 2004 cycle was much less 

pronounced. Mortgage rates entering 2004 were above 5 percent for both 15- and 30-year mortgages, more than 2 percentage points 

higher than early 2022 levels. In contrast to the rapid increase in mortgage interest rates in 2022, mortgage rates generally did not increase 

more than a percentage point by 2006, at the end of the 2004 cycle.

Higher mortgage rates in 2022 may reflect several factors. In addition to raising policy rates, the Federal Reserve began to reduce 

purchases of mortgage-related securities in 2022, which further tightened conditions in the market.13 This contrasts to the monetary 

policy tightening during the 2004 cycle, when the Federal Reserve’s balance sheet did not contain agency mortgage-backed securities. 

In addition, the spread between mortgage rates and long-term Treasuries have risen from the historic range, in part reflecting higher 

economic uncertainty.14

As mortgage rates rose, mortgage originations fell 50.1 percent for both banks and nonbanks in 2022 and bank originations declined 

51.6 percent, according to Inside Mortgage Finance.15 Despite the decline in originations, banks reported growth in 1–4 family residential 

mortgage balances. The strong rise in mortgage loans may reflect that banks may be holding more residential loans.16 Mortgages 

originated when interest rates were low would have a lower value when interest rates rose, reducing the incentive for banks to sell them. 

Mortgage sales declined 65.9 percent in 2022.

Similarly, the mortgage market slowed and mortgage originations declined in the mid-2000s after a period of strong growth. Mortgage 

originations were down 22.3 percent between year-end 2003 and 2006, according to Inside Mortgage Finance.17 More broadly, the decline 

in the mortgage market during the mid-2000s followed a period of unusually strong market growth and reflected factors other than higher 

interest rates that contributed to a housing market correction.18 These factors did not contribute to housing market conditions in 2022.

13Federal Reserve Board of Governors, “Plans for Reducing the Size of the Federal Reserve’s Balance Sheet,” news release, May 4, 2022, https://www.federalreserve.gov/

newsevents/pressreleases/monetary20220504b.htm.

14 Wendy Edelberg and Noadia Steinmetz-Silber, “High Mortgage Rates Are Probably Here for a While,” Brookings Institution Commentary, June 8, 2023, https://www.brookings.edu/

articles/high-mortgage-rates-are-probably-here-for-a-while/#:~:text=Nonetheless%2C%20to%20compensate%20investors%20for,rates%20have%20risen%20as%20well.

15 Inside Mortgage Finance, 2023. Used with permission, https://www.insidemortgagefinance.com/.

16 See the Housing Section of the 2023 Risk Review, FDIC, August 14, 2023, https://www.fdic.gov/analysis/risk-review/2023-risk-review.html.

17 Inside Mortgage Finance.

18 Factors include excess inventory, loose credit, high leverage, and more market speculation. See Crisis and Response.

Mortgage Rates Rose Sharply in 2022

Percent

Sources: Federal Home Loan Mortgage Corporation and Federal Reserve Board (Haver Analytics).

Note: Mortgage rate data are weekly as of August 31, 2023, and are calculated as a four-week moving average. Eective federal funds

rate data are monthly as of August 2023.

Chart 3

Eective Federal Funds Rate

15-Year Fixed Rate Mortgage

30-Year Fixed Rate Mortgage

0

1

2

3

4

5

6

7

8

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Sources: Federal Home Loan Mortgage Corporation and Federal Reserve Board (Haver Analytics).

Note: Mortgage rate data are weekly as of August 31, 2023, and are calculated as a four-week moving average.

Federal funds eective rate data are monthly as of August 2023.
QUARTERLY 2023 VOLUME 17, NUMBER 3

52 

INCOME Higher interest rates in the 2004 cycle and in 2022 contributed to 

sharply higher net interest income. In 2022, strong loan growth and a 

sharp rise in interest rates caused median net interest income growth 

to rise to 10.2 percent, the fourth-largest median net interest income 

growth since 1984 (Table 3). This growth was nearly double the median 

growth of 6.1 percent in 2021 and more than double the ten-year 

average median growth of 3.7 percent. All asset size groups reported 

robust growth greater than in 2021 and greater than the ten-year 

average. Only 17.6 percent of banks did not report net interest income 

growth in 2022. Larger banks had higher net interest income growth 

likely due to their lower share of longer-term loans with contractual 

interest rates that did not reprice upward as market interest rates 

increased.19 The median net interest income growth continued to 

increase and the year-over-year growth rate increased to 17.9 percent 

in first quarter 2023. Similarly, net interest income growth rose during 

the 2004 rising rate cycle. The median growth rate of net interest 

income was 6.2 percent during that cycle, more than double the median 

growth rate of 2.5 percent in 2003.

19 Longer-term loans for purposes of this discussion are those with maturities greater than three years. Banks in the largest asset size group had a median longer-term-loansto-assets ratio of 13.0 percent in 2021, significantly lower than the median ratio of 31.6 percent for all banks. Conversely, banks in the largest asset size group had a median 

longer-term-loans-to-assets ratio of 15.7 percent in 2003, similar to the median ratio of 17.0 percent for all banks.

Table 3

Net Interest Income Rose for Banks Across Asset Size Groups in 2004 to 2006 and in 2022

Median Annual Growth in Net Interest Income (Percent)

2003 2004 to 2006 2012 to 2021 2021 2022

Industry 2.5 6.2 3.7 6.1 10.2

Asset Size Groups

 Greater Than $250 Billion 2.8 7.0 0.8 –4.2 25.7

 $10 Billion to $250 Billion 1.4 7.2 5.5 2.6 18.8

 $1 Billion to $10 Billion 2.8 9.3 6.2 8.7 13.7

 $100 Million to $1 Billion 3.5 7.5 4.0 6.7 9.3

 Less Than $100 Million 1.5 4.4 1.3 1.5 6.9

Source: FDIC.

Note: Net interest income is the difference between interest income and interest expense. Growth rate is calculated as the annual change in balance as of December 31 of each year, 

adjusted for mergers. Simple average is calculated for multiple years.
QUARTERLY 2023 VOLUME 17, NUMBER 3

53 

While higher interest rates support interest income, the effects of 

higher interest rates on Net Interest Margin (NIM), which represent 

bank earnings from asset yields net of funding costs, are theoretically 

ambiguous. NIM tends to follow the direction of short-term interest 

rates, but NIM is influenced by many factors including asset maturity 

and repricing, balance sheet composition, and prevailing interest 

rates.20 Both asset yields and cost of funds typically rise as interest 

rates rise, and typically follow the same pattern (Chart 4).

Net interest income is the primary revenue source for most banks, and 

banks tend to increase interest rates for loans faster than they increase 

the interest rates paid on deposits. Higher rates may support bank 

NIM in the short run, but banks may eventually have to pay more to 

retain deposits. An inverted yield curve could weigh on NIM over time 

as higher short-term interest rates drive up funding costs while lower 

longer-term rates keep yields on loans and other longer-term assets 

down. Higher rates could also weigh on net interest income and NIM if 

funding costs rise but banks are unable to extend loans at higher rates 

due to weak loan demand.

20 For a discussion of other determinants of bank profitability, see Angela Hinton and Chester Polson, “The Historic Relationship Between Bank Net Interest Margins and 

Short-Term Interest Rates,” FDIC Quarterly 15 no. 2 (2021): 31–41, https://www.fdic.gov/analysis/quarterly-banking-profile/fdic-quarterly/2021-vol15-2/article1.pdf.

Yield on Assets and Cost of Funds Increased in Both the 

2004 to 2006 and 2022 Rising Rate Cycles

Median Percent

Source: FDIC.

Note: Data as of first quarter 2023. For 2002 to 2022, yield on assets is calculated as the full-year interest income divided by 

the five-quarter average earning assets; cost of funds is calculated as the full-year interest expense divided by the five-quarter 

average earning assets. For 2023, yield on assets is calculated as the quarterly annualized interest income divided by the

two-quarter average earning assets; cost of funds is calculated as the quarterly annualized interest expense divided by the 

two-quarter average earning assets.

Chart 4

0.0

1.5

3.0

4.5

6.0

7.5

9.0

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Yield on Earning Assets

Cost of Funding Earning Assets

Net Interest Margin Is the Dierence Between the Two
QUARTERLY 2023 VOLUME 17, NUMBER 3

54 

The trends for NIM varied between the two rate hike cycles. NIM for the 

industry as a whole was higher in the 2004 cycle than in 2022 (Chart 5). 

However, NIM generally decreased during the 2004 cycle, as the increase 

in funding costs generally outweighed the increase in yield on assets. 

The relatively large increase in NIM in 2022 reflects sharply higher 

interest rates and follows a period during which NIM was much lower. 

NIM had generally been on the decline for years before reaching record 

lows in 2021.21 Since interest rates remained generally low and deposits 

were relatively stable, bank funding costs remained stable, while low 

rates kept asset yields low. Toward the end of 2022, bank deposit rates 

fell farther below market rates than in previous periods, as discussed 

in more detail later in this article. As interest rates rose sharply in 

2022, NIM grew at a relatively fast pace (Chart 6). Relatively low deposit 

rates enabled NIM to rise even as short-term market interest rates rose 

sharply and the yield curve inversion steepened. Funding costs started 

to rise later in 2022 and continued in 2023, and contributed to the 

contraction of NIM at some banks.

21Data collection began in 1984.

Net Interest Margins Rebounded in 2022 Aer Reaching a Record Low

Percent

Sources: FDIC and Federal Reserve Board (Haver Analytics).

Note: Data as of first quarter 2023. For 2002 to 2022, NIM is calculated as the full-year net interest income divided by the five-quarter

average earning assets. For 2023, NIM is calculated as the quarterly annualized net interest income divided by the two-quarter

average earning assets. Eective federal funds rate data represent end-of-period values (annual through 2022 and quarterly for 2023).

Chart 5

0

1

2

3

4

5

6

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Aggregate NIM

Median NIM

Eective Federal Funds Rate
QUARTERLY 2023 VOLUME 17, NUMBER 3

55 

Median NIM followed a similar pattern as aggregate NIM with a 

slightly larger increase in 2022 than in the 2004 cycle.22 In 2022, the 

majority of bank asset size groups reported growth in NIM relative to 

their 2021 ratios, with the increase being more pronounced for larger 

banks (Table 4). NIM at more than 65 percent of banks increased in 

2022 in varying amounts (Chart 7). The median NIM continued to 

trend upward in first quarter 2023 to 3.51 percent as the rise in median 

yield on earning assets was larger than the rise in the median cost of 

funding earning assets.

By comparison, in the 2004 cycle, both the median yield on earning 

assets and the median cost of funds rose more than in 2022, in part 

reflecting differences in the maturities of assets versus liabilities.23

Banks held more shorter-term assets during the 2004 cycle. When 

interest rates started to rise, the loans that were made at higher 

interest rates represented a larger share of portfolios, which 

contributed to the notable rise in asset yields. Banks also paid more for 

deposits, which moderated the median increase in NIM.

22The difference between the median yield on earning assets and the median cost of funding earning assets will not tie to the median NIM or change in NIM as the median 

figures may represent different banks.

23 Huberto M. Ennis, Helen Fessenden, and John R. Walter, “Do Net Interest Margins and Interest Rates Move Together?” Federal Reserve Bank of Richmond Economic Brief, May 

2016, https://www.richmondfed.org/publications/research/economic_brief/2016/eb_16-05.

The Cumulative Change in Net Interest Margin for the Industry 

Was Significantly Greater in 2022 Than in 2004 to 2006

Cumulative Change in Net Interest Margin, Basis Points

Number of Quarters Since Initial Rate Hike

Source: FDIC.

Note: Data as of first quarter 2023. The two years (2004 and 2022) depict the beginning of interest rate hike cycles. The cumulative 

change in NIM is the dierence between the NIM at a given quarter compared to the quarter before the rate hike. NIM is annualized

and reflective of the aggregate NIM for all banks.

Chart 6

#

-40

-20

0

20

40

60

80

100

0 1234567 8

2004

2022

Number of Quarters Since Initial Rate Hike
QUARTERLY 2023 VOLUME 17, NUMBER 3

56 

Net Interest Margin Increased From 2021 to 2022 for Most Banks

Distribution of the Change in Net Interest Margin From 2021 to 2022

Percent of banks

Source: FDIC.

Note: Data as of fourth quarter 2022. Change in NIM is calculated as the dierence between the full-year NIM in 2021 and 2022. 

The population includes only banks that existed in both 2021 and 2022.

Change in Basis Points 

Chart 7

23.7

10.5

12.4 12.2 11.7

9.6

6.8

13.1

0

5

10

15

20

25

<-10 -10-0 0-10 10-20 20-30 30-40 40-50 >50

Table 4

Net Interest Margins for Larger Banks Rose Sharply in 2022 and Declined in 2004 to 2006

Median Annual Net Interest Margin (Percent)

2003 2004 to 2006 2012 to 2021 2021 2022

Industry 4.00 4.05 3.62 3.27 3.38

Asset Size Groups

 Greater Than $250 Billion 3.71 3.20 2.97 1.99 2.43

 $10 Billion to $250 Billion 3.66 3.40 3.28 2.91 3.29

 $1 Billion to $10 Billion 3.76 3.78 3.52 3.24 3.42

 $100 Million to $1 Billion 3.98 4.03 3.66 3.32 3.41

 Less Than $100 Million 4.05 4.12 3.60 3.18 3.20

Source: FDIC.

Note: NIM is calculated as the full-year net interest income divided by the five-quarter average earning assets. Simple average is calculated for multiple years.
QUARTERLY 2023 VOLUME 17, NUMBER 3

57 

DEPOSITS AND FUNDING COSTS Bank deposit rates tend to increase more gradually than do market 

interest rates. Bank deposit rates in 2022 did not begin to rise 

appreciably with market rates at first, as deposits were generally at 

high levels, reducing the need to raise deposit rates quickly.24 Later in 

2022 and into 2023, however, deposit interest rates began to be more 

responsive to changes in market rates. Implied deposit betas, which 

measure sensitivity to market rates, started to increase (Chart 8).25

The increase in deposit betas was more pronounced later in 2022 than 

earlier in the year. While the federal funds target rate increased by the 

same degree in both second and fourth quarter 2022 (125 basis points), 

the aggregate implied deposit beta for the banking industry increased 

from 9 percent in second quarter 2022 to 49 percent in fourth quarter 

2022. The increase reflects higher quarterly cost of interest-bearing 

deposits, which rose 11 basis points in second quarter 2022 and 61 basis 

points in fourth quarter 2022. Banks tend to delay passing on rate

24Bank deposits rose to unusually high levels in 2020 and 2021 reflecting changes in consumer savings during onset of the COVID-19 pandemic in 2020 and expanded 

government support programs. For a discussion on the expansion of the deposit base and the implications for banks, see Caitlyn R. Kasper and Benjamin Tikvina, 

“Implications of Record Deposit Inflows for Banks During the Pandemic,” FDIC Quarterly 15 no. 4 (2021): 45–54, https://www.fdic.gov/analysis/quarterly-banking-profile/fdicquarterly/2021-vol15-4/article2.pdf.

25 Implied deposit beta represents the change in the estimated quarterly average deposit rate divided by the change in the quarterly federal funds target rate. For example, if the federal 

funds target rate increases by 50 basis points and the average cost of interest-bearing deposits increases by 25 basis points, then the implied deposit beta is 50 percent.

The Increase in the Implied Deposit Beta Was Larger and Faster in 2022 

Than in 2004 to 2006

Implied Deposit Beta, Percent

Source: FDIC.

Note: Data as of first quarter 2023. Implied deposit beta represents the change in the estimated quarterly average deposit rate

divided by the change in the federal funds target rate. Average deposit rates represent quarterly average interest expense divided 

by average interest-bearing deposit levels, which are an average between current and prior quarter-end balances.

Chart 8

#

#

-40

-20

0

20

40

60

80

100

120

2004 2005 2006 2022 2023

Aggregate

Median

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1
QUARTERLY 2023 VOLUME 17, NUMBER 3

58 

hike increases to depositors in order to maximize NIM, as reflected 

initially in low deposit betas. However, as depositors reach for greater 

yields, deposit competition later in the cycle increases the pressure for 

banks to increase deposit rates to retain depositors, and deposit betas 

increase.26

As bank deposit rates remained below market rates, deposit growth 

weakened during both the 2004 and the 2022 rate hike cycles. In 

particular, banking industry aggregate deposit growth slowed during 

both cycles and turned negative in 2022 (Chart 9). The decline in total 

deposits for the banking industry in 2022 followed a period of high 

deposit growth. The decline may reflect a normalization after reaching 

high levels during the pandemic. Bank deposit rates remaining below 

market rates also may have contributed to declines in deposits at 

some banks as depositors shifted to higher-yielding investments.27

The decline in total deposits was led by large declines in uninsured 

deposits, as these may reflect larger deposits that may be more 

sensitive to higher interest rates. Although insured deposits increased, 

the decline in uninsured deposits led to the largest quarterly decline in 

total deposits in first quarter 2023 since data collection began in 1984.

The median deposit growth rates in Table 5 reflect the experience of 

typical small banks. Similar to the aggregate deposit growth in Chart 9, 

effects on median deposit growth in the 2004 cycle were more muted 

than in the 2022 cycle. Median deposit growth remained steady 

(compared to the year-earlier level) at 5.2 percent during the 2004 

cycle. In contrast, median deposit growth in 2022 of 2.6 percent was 

low relative to the ten-year average and much lower than in 2021. The 

relatively slow median deposit growth in 2022 reflects a normalization 

from strong growth in 2021. The slowdown in deposit growth 

continued, as median deposit growth was flat in first quarter of 2023.28

26Alena Kang-Landsberg, Stephan Luck, and Matthew Plosser, “Deposit Betas: Up, Up, and Away?” Federal Reserve Bank of New York Liberty Street Economics, April 11, 2023, 

https://libertystreeteconomics.newyorkfed.org/2023/04/deposit-betas-up-up-and-away/.

27 Gara Afonso, Marco Cipriani, Catherine Huang, Abduelwahab Hussein, and Gabriele La Spada, “Monetary Policy Transmission and the Size of the Money Market Fund Industry: An 

Update,” Federal Reserve Bank of New York Liberty Street Economics, April 3, 2023, https://libertystreeteconomics.newyorkfed.org/2023/04/monetary-policy-transmission-andthe-size-of-the-money-market-fund-industry-an-update/.

28 The banking stress in early March 2023 also contributed to deposit outflows at many banks. On March 8, 2023, Silvergate Bank announced its intent to self-liquidate. On March 10, 

2023, the California Department of Financial Protection and Innovation (CADFPI) closed Silicon Valley Bank (SVB). Contagion effects from SVB’s failure began to spread through traditional media, social media, and short sellers to other banks with perceived similar risk characteristics, notably, those with high levels of uninsured deposits, concentrations of customers in the venture capital and tech industries, and high levels of unrealized losses on securities. Contagion effects initially manifested in large declines in stock prices and then in 

deposit outflows at certain other banks. For two of these banks—Signature Bank and First Republic Bank—deposit outflows became deposit runs and exposed other weaknesses that 

could not be overcome, leading to their failures. On March 12, 2023, the New York State Department of Financial Services closed Signature Bank of New York. On May 1, 2023, 

CADFPI closed First Republic Bank.
QUARTERLY 2023 VOLUME 17, NUMBER 3

59 

Total Deposits Began to Decline in 2022, in Part Reflecting Normalization 

From Unusually High Levels in 2020 and 2021

Percent

Source: FDIC.

Note: Data as of fourth quarter 2022. Growth rate is calculated as the annual change in balance as of December 31 of each year.

Median growth is adjusted for mergers.

Chart 9

#

#

-5

0

5

10

15

20

25

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Aggregate Growth Rate

Median Growth Rate

Deposit trends varied across banks in 2022, with more than half of 

banks reporting deposit growth. The largest banks had the greatest 

median deposit outflow in 2022, despite increasing deposit interest 

rates at a faster rate.29 Smaller banks had positive median growth in 

deposits (Table 5). During the 2004 cycle, larger banks reported faster 

deposit growth than small banks.

29Banks in the largest asset size group had the highest median increase in the cost of interest-bearing deposits—up 50 basis points in 2022 and 130 basis points between fourth 

quarter 2022 and first quarter 2023. This is significantly higher than the median increase for all banks—up 8 basis points in 2022 and 70 basis points between fourth quarter 

2022 and first quarter 2023.

Table 5

Deposit Growth Moderated in 2022 After Strong Gains in 2021, While Deposit Growth Was More Stable in 2004 to 2006

Median Annual Growth in Total Deposits (Percent)

2003 2004 to 2006 2012 to 2021 2021 2022

Industry 5.1 5.2 5.5 11.9 2.6

Asset Size Groups

 Greater Than $250 Billion 11.5 12.8 7.5 5.5 –4.8

 $10 Billion to $250 Billion 5.4 8.7 8.7 11.4 –0.6

 $1 Billion to $10 Billion 6.6 8.8 8.3 13.9 2.6

 $100 Million to $1 Billion 6.1 6.7 5.7 12.3 3.0

 Less Than $100 Million 3.8 2.9 3.1 8.3 1.3

Source: FDIC.

Note: Growth rate is calculated as the annual change in balance as of December 31 of each year, adjusted for mergers. Simple average is calculated for multiple years.
QUARTERLY 2023 VOLUME 17, NUMBER 3

60 

Deposit costs rose in 2022 as depositors shifted funds to interestbearing accounts. The median cost of interest-bearing deposits rose 

8 basis points in 2022 to 0.48 percent, with more than 60 percent of 

banks reporting an increase, albeit mostly small. Banks in the largest 

asset size group reported the highest median cost of interest-bearing 

deposits (0.54 percent) while banks in the smallest asset size group 

reported the lowest median cost of interest-bearing deposits (0.42 

percent). Banks for which NIM decreased in 2022 tended to pay higher 

interest on deposits compared to banks for which NIM increased.30

The median annualized cost of interest-bearing deposits rose 70 

basis points in first quarter 2023 to 1.18 percent as banks continued to 

compete for business and depositors shifted funds from noninterestbearing to interest-bearing products (Chart 10).31 These values reflect 

each bank’s average funding costs for the quarter and therefore 

understate the increase in funding costs for marginal deposits, as 

deposit rates for new deposits would be higher.

30At banks for which NIM decreased, the median increase in cost of interest-bearing deposits was 6 basis points compared to 2 basis points at banks for which NIM increased. 

The median increase was 3 basis points for the 4,691 banks that filed Call Reports in both 2021 and 2022. Note that this calculation reflects the median change in cost of 

interest-bearing deposits by calculating the median value of the difference in the cost of interest-bearing deposits in 2021 and 2022 for each bank. This is different from the 

8 basis points change in median cost of interest-bearing deposits, which calculates the median cost of interest-bearing deposits in 2021 and 2022 and takes the difference 

between the two median values (the median values in 2021 and 2022 may reflect values for different banks).

31 In first quarter 2023, some deposits within banks shifted from noninterest-bearing deposits, which declined at a median rate of 3.1 percent, to interest-bearing deposits, which 

increased at a median rate of 0.7 percent. Banks that had the largest annual growth (top 25th percentile) in interest-bearing deposits in first quarter 2023 reported a median annual 

increase in cost of interest-bearing deposits of 26 basis points, compared to 15 basis points at banks in the bottom 75th percentile.

Deposit Composition Shied More Toward Interest-Bearing Deposits in 2022

Median Annual Growth Rate

Percent

Source: FDIC.

Note: Data as of first quarter 2023. For 2002 to 2022, growth rate is calculated as the annual change in balance as of December 31 of

each year. For 2023, growth rate is calculated as the annual change in balance as of March 31. Median growth is adjusted for mergers.

Chart 10

-5

0

5

10

15

20

25

30

35

40

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Interest-Bearing Deposits

Noninterest-Bearing Deposits
QUARTERLY 2023 VOLUME 17, NUMBER 3

61 

Banks facing deposit outflows in 2022 turned to other borrowings 

for liquidity and funding sources to finance loan growth during the 

year. The median wholesale-funds-to-assets ratio increased from 

12.3 percent in 2021 to 14.7 percent in 2022 and to 15.6 percent in first 

quarter 2023.32 The largest banks reported the largest increase in their 

median wholesale-funds-to-assets ratio, from 10.4 percent in 2021 

to 17.4 percent in 2022. The increase was broad based, as 68.1 percent 

of banks reported an increase in their wholesale-funds-to-assets 

ratio. This trend is similar to the 2004 to 2006 cycle when the median 

wholesale-funds-to-assets ratio increased from 11.8 percent in 2003 to 

13.2 percent in 2006.

UNREALIZED LOSSES ON SECURITIES Rising interest rates reduce the value of securities that yield a fixed 

interest rate. These valuation declines would result in unrealized losses 

on securities but do not necessarily result in losses for banks as long 

as they hold these securities.33 Bank investment securities for which 

management has the positive intent and ability to hold to maturity 

are classified as held-to-maturity, while securities that may be sold 

before maturity are classified as available-for-sale. Available-forsale securities are reported at fair (market) value, with unrealized 

gains or losses (i.e., changes in market values) reflected in equity (and 

regulatory capital for some banks).34 In contrast, held-to-maturity 

securities are reported at amortized cost and unrealized losses are not 

generally reflected in equity or regulatory capital.35

Unrealized losses may reduce liquidity, reduce the level of tangible 

equity, and weigh on future earnings.36 Investment securities often 

represent a large proportion of an institution’s on-balance sheet 

liquidity because they can be sold for cash or pledged to obtain 

additional funding. Securities with lower values would be a lessfavorable source of liquidity since losses would have to be realized 

in the event of their sale, and banks’ ability to pledge collateral or 

meet margin requirements when seeking access to wholesale or other 

sources of alternative funding may be reduced. Since depreciated 

securities earn below-market interest rates, holding large amounts of 

them also tends to depress earnings.

32Wholesale funding includes federal funds purchased and securities sold under agreement to repurchase; Federal Home Loan Bank borrowings; brokered deposits (net of 

reciprocal deposits), municipal, state, and foreign deposits (foreign deposits are not FDIC-insured); other borrowings; and listing services.

33 Unrealized gains (losses) on securities solely reflect the difference between the market value as of quarter end and the book value of non-equity securities.

34 Unrealized gains (losses) on available-for-sale securities are reported in equity as part of accumulated other comprehensive income (AOCI) and may affect capital (advanced 

approaches banks and those that opt-in to the AOCI-related adjustments must report AOCI as part of regulatory capital). On July 27, 2023, the Office of the Comptroller of the 

Currency, the Board of Governors of the Federal Reserve System, and the FDIC issued a notice of proposed rulemaking that, among other proposed changes, would require banks 

with total assets of $100 billion or more to include unrealized gains and losses on available-for-sale debt securities in their capital ratios, resulting in a measure that better reflects 

institutions’ actual loss absorption capacity at a specific point in time and in a consistent set of capital requirements across large banks. See FDIC, “Agencies Request Comment on 

Proposed Rules to Strengthen Capital Requirements for Large Banks,” news release no. PR-55-2023, July 27, 2023, https://www.fdic.gov/news/press-releases/2023/pr23055.html.

35 Exceptions can exist if a bank reclassifies a security from available-for-sale to held-to-maturity.

36 W. Blake Marsh and Brendan Laliberte, “The Implications of Unrealized Losses for Banks,” Federal Reserve Bank of Kansas City Economic Review, Second Quarter 2023, 

https://www.kansascityfed.org/Economic%20Review/documents/9473/EconomicReviewV108N2MarshLaliberte.pdf.
QUARTERLY 2023 VOLUME 17, NUMBER 3

62 

Higher rates significantly increased unrealized losses on availablefor-sale and held-to-maturity securities in 2022, and unrealized losses 

remained elevated in 2023 (Chart 11). Continued depreciation of bank 

investment portfolios could increase liquidity risk, particularly for 

banks with higher shares of longer-dated securities, should banks 

have to sell investments and realize losses to meet their liquidity needs 

(box on page 64).37 This vulnerability was highlighted in early 2023, 

when deposit outflows at banks with high levels of uninsured deposits 

became deposit runs and exposed other weaknesses that could not be 

overcome, leading to the failures of three banks.38

The unrealized losses in 2022 were significantly higher than during 

the previous two decades, including during the 2004 cycle, in part due 

to larger securities holdings. Banks responded to the surge in liquidity 

from higher deposits in 2020 and 2021 primarily by increasing their 

investment in longer-term securities rather than loans. Loan growth 

was tepid in 2020, and interest rates were low through 2021.39 The share 

of securities with maturities greater than three years was much higher 

in 2022 than in 2004 (Chart 12). When interest rates rose sharply in 

2022, the market value of securities holdings depreciated significantly. 

The median unrealized losses as a percent of total assets grew to

37A bank’s risk profile varies depending on the duration, maturity, differential, and composition of assets (loans and investments) and liabilities (deposits and other 

borrowings). Carl White, “Rising Interest Rates Complicate Banks’ Investment Portfolios,” On the Economy Blog, Federal Reserve Bank of St. Louis, February 9, 2023, 

https://www.stlouisfed.org/on-the-economy/2023/feb/rising-rates-complicate-banks-investment-portfolios#:~:text=While%20rising%20interest%20rates%20

give,investment%20securities%20held%20as%20assets.

38 For more information, see “Remarks by Chairman Martin J. Gruenberg on Oversight of Financial Regulators: Financial Stability, Supervision, and Consumer Protection in the Wake 

of Recent Bank Failures Before the Committee on Banking, Housing, and Urban Affairs, United States Senate,” May 2023, https://www.fdic.gov/news/speeches/2023/spmay1723.html. 

39 The median loan growth rate was 1.4 percent in 2020. The median deposit growth was 16.9 percent in 2020 and 11.9 percent in 2021. The median securities growth was 15.3 percent in 

2020 and 31.4 percent in 2021.

Unrealized Losses Remained Elevated Through First Quarter 2023

Aggregate Unrealized Gains (Losses), $ Billions

Source: FDIC.

Note: Data as of first quarter 2023. Data for 2002 to 2022 are as of December 31. Data for 2023 are as of March 31.

Unrealized gains (losses) on securities solely reflect the dierence between the market value as of quarter end and 

the book value of non-equity securities. 

Chart 11

-700

-600

-500

-400

-300

-200

-100

0

100

200

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
QUARTERLY 2023 VOLUME 17, NUMBER 3

63 

–2.2 percent in 2022 and slightly shrank to –1.9 percent in first quarter 

2023 (Chart 13). Banks that held a higher share of longer-term loans 

and securities at the beginning of 2022 fared worse than banks that 

held a lower share. The largest asset size group reported the largest 

median unrealized losses to total assets ratio, likely because those 

banks had the highest median ratio of longer-term securities to assets 

in 2021 before the interest rate increase cycle in 2022 (Chart 12).40

Conversely, the largest asset size group had the lowest exposure to 

unrealized losses on securities in 2004 to 2006, likely because they had 

the lowest median ratio of longer-term securities to assets in 2003.

40 Longer-term securities have maturities greater than three years. Banks in the largest asset size group had the highest median longer-term-securities-to-assets ratio of 22.1 

percent in 2021, significantly higher than the median ratio of 15.6 percent for all banks. Conversely, banks in the largest asset size group had the lowest median-longer-termsecurities-to-assets ratio of 8.7 percent in 2003, lower than the median ratio of 11.6 percent for all banks.

Banks Held a Greater Share of Longer-Term Securities in 2022 Than in 2004

Median Longer-Term Securities as a Percent of Total Assets

Source: FDIC.

Note: Data as of first quarter 2023. Data for 2002 to 2022 are as of December 31. Data for 2023 are as of March 31. 

Longer-term securities have maturities greater than three years.

Chart 12

0

4

8

12

16

20

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Industry >$250 Billion

$10 Billion–$250 Billion $1 Billion–$10 Billion

$100 Million–$1 Billion <$100 Million

Unrealized Losses Were the Largest for Banks With Assets Greater

Than $250 Billion

Median Unrealized Gains (Losses) as a Percent of Total Assets

Source: FDIC.

Note: Data as of first quarter 2023. Data for 2002 to 2022 are as of December 31. Data for 2023 are as of March 31.

Unrealized gains (losses) on securities solely reflect the dierence between the market value as of quarter end and

the book value of non-equity securities.

Chart 13

-3

-2

-1

0

1

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Industry (-1.9) >$250 Billion (-2.1)

$10 Billion–$250 Billion (-1.8) $1 Billion–$10 Billion (-1.7)

$100 Million–$1 Billion (-1.9) <$100 Million (-1.7)
QUARTERLY 2023 VOLUME 17, NUMBER 3

64 

LIQUIDITY DECLINED DURING THE TWO INTEREST RATE CYCLES

Deposit outflows, rapid loan growth, unrealized losses on securities, and growth of secured wholesale funding all contributed to the decline 

in the liquid assets to total assets ratio in 2022.41 For the industry as a whole, bank liquidity, as measured by the ratio of liquid assets to total 

assets, declined but remained above pre-pandemic levels (Chart 14). The ratio of liquid assets to total deposits, a measure of a bank’s ability 

to meet an outflow of deposits, also declined as lower deposits and higher cash and balances due from depository institutions were offset by 

declines in securities. Liquidity also declined for the banking industry during the 2004 cycle but to a smaller degree.

Liquid assets for the median bank also declined. The median liquid assets to total assets ratio fell from 30.3 percent in 2021 to 22.2 percent 

in 2022 and to 21.4 percent in first quarter 2023. The largest banks reported the largest decline in their median liquid assets to total assets 

ratio, from 45.3 percent in 2021 to 36.2 percent in 2022. The decrease was broad based, as 86.4 percent of banks reported a decrease in their 

liquid assets to total assets ratio. This trend is similar to the 2004 cycle, when the median liquid assets to total assets ratio decreased from 

22.5 percent in 2003 to 17.3 percent in 2006.

41Liquid assets are defined as cash, federal funds sold, securities purchased under agreements to resell, and securities (including unrealized gains/losses on securities) less 

pledged securities.

Bank Liquidity Began to Decline in 2022 but Normalized Above 

Its 2019 Level

Aggregate Liquid Assets as a Percent of Total Assets

Source: FDIC.

Note: Data as of first quarter 2023. Data for 2002 to 2022 are as of December 31. Data for 2023 are as of March 31. Liquid assets are 

defined as cash, federal funds sold, securities purchased under agreements to resell, and securities (including unrealized

gains/losses on securities) less pledged securities.

Chart 14

0

5

10

15

20

25

30

35

40

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Source: FDIC.

Note: Data as of first quarter 2023. Data for 2002 to 2022 are as of December 31. Data for 2023 are as of March 31.

Liquid assets are defined as cash, federal funds sold, securities purchased under agreements to resell, and 

securities (including unrealized gains/losses on securities) less pledged securities.
QUARTERLY 2023 VOLUME 17, NUMBER 3

65 

CONCLUSION The sharp increase in interest rates in 2022 resulted in shifting 

conditions for the banking industry. This rate hike came after an 

earlier pandemic-related surge in deposits—with proceeds often 

invested in longer-term securities—and amid rapid loan growth and 

general price inflation in 2022. With loans growing rapidly, higher 

interest rates initially supported growth in net interest income and 

NIM. More recently, higher market interest rates have resulted in 

deposit outflows and higher funding costs, along with high levels of 

unrealized losses on securities. Challenges relative to decelerating 

loan growth, increased funding costs, and decreased liquidity 

became more evident by first quarter 2023. Some of these trends were 

apparent in the 2004 cycle. Banks benefited from higher rates at the 

beginning of the 2004 cycle, but to a more limited extent. Banks were 

also challenged in the 2004 cycle by decelerating growth of loans and 

deposits and decreased fair value of assets and liquidity. While the 

effects of higher interest rates on banking outcomes generally followed 

a similar pattern between the two cycles, many factors were at play, 

including economic and financial market conditions, asset and liability 

composition, and asset maturity structures.

Authors:

Nafij Ahmed

Economic Analyst

Division of Insurance and Research

Dorothy G. Miranda

Senior Financial Analyst

Division of Insurance and Research

Krishna Patel

Economic Analysis Section Chief

Division of Insurance and Research