Community bankers’ outlook on economic conditions has fallen to a record low amid concerns surrounding monetary policy, regulations, future business conditions and profitability, according to the second quarter Community Bank Sentiment Index released by the Conference of State Bank Supervisors.
The index fell 10 points to 73 in the second quarter, its lowest mark since the survey began in 2019. An index reading of 100 indicates a neutral sentiment. Ninety-five percent of community bankers said the U.S. economy was already in a recession.
The profitability component had the largest quarterly decline for the third straight quarter, falling 14 points from Q1 2023 and 33 points from a year ago. The regulatory burden component remained the lowest at 18 points, falling four points from the previous quarter to a record low. Expectations that the Federal Reserve’s approach to monetary policy will hamper market conditions pushed the overall index down six points to 33 in the second quarter. The outlook for future business conditions fell eight points to 43.
“Community bankers rated the following as their top concerns for 2023: government regulation, cyberattacks, inflation, federal debt/deficit and the cost/availability of labor,” CSBS stated. “These concerns have been rated amongst the highest five concerns since the beginning of 2021.”
The CBSI surveys community bankers across the country in the last month of each quarter to capture their thoughts on future economic conditions in seven areas.
“Community banker sentiment has been pessimistic for six straight quarters,” said Chief Economist Tom Siems. “They are navigating the effects of higher interest rates that have stressed liquidity, lending growth and fixed-rate securities portfolios. Moreover, following the high-profile bank failures earlier this year, community bankers are more concerned about regulatory overreach.”
The Federal Open Market Committee has raised its benchmark federal funds rate at a range of 5 to 5.25 percent from near-zero since the start of 2022. Though the FOMC paused interest rate hikes in June for the first time in 15 months, Chair Jerome Powell said late last month that the FOMC will likely raise rates at least two more times this year.
According to The Wall Street Journal, regulators revealed last month that they are looking to increase large bank capital requirements by as much as 20 percent for banks with at least $100 billion in assets, which is less than the current $200 billion minimum. Federal Reserve Gov. Michelle Bowman said any shift to a uniform capital requirements framework would place smaller banks at a competitive disadvantage and could require them to either pull out of key business lines or merge just to meet the necessary economies of scale.
In a June EY-Parthenon report, the firm lowered the chances of a recession to 55 percent, projecting GDP growth of 1.2 percent this year before falling to 0.7 percent expansion in 2024. The company predicted that unemployment will rise toward 4.1 percent by the end of the year before increasing to 4.5 percent in 2024.
Chief Economist Gregory Daco said the current trend of businesses holding on to employees has caused a limited impact on household income and a gradual spending slowdown. “The need to address supply shortages across the economy has supported robust construction activity, prevented a severe manufacturing pullback, and helped price and wage pressures ease,” he noted. “Still, there are notable headwinds from persistently elevated prices and costs, tightening credit conditions and rising interest rates.”