Today I read a WSJ article about deposits at Main Street banks and interest rates. It’s an interesting read that explains how the rapid increase in interest rates is affecting community banks’ ability to attract and retain deposits.

In a post a few months ago, I said that banks will start having to compete for deposits, which we haven’t seen in almost twenty years. The willingness of consumers to move funds in search of higher yields will be the forcing function in this competition.

According to today’s article, Randy Chesler, CEO of Glacier Bancorp, explained, “We went through a decade of zero to low rates, and so there was a little muscle memory that had to be developed in terms of competing for deposits.”

Chip Reeves, CEO of MidWestOne Financial Group, has been in banking for thirty years. He was quoted as saying that “[i]t’s probably the greatest deposit competition that I’ve seen in my banking career.”

The competition for deposits is on. Non-mega banks (sub $250B in assets) will be fighting each other to attract and retain deposits. The first-order effect is that depositors will be paid more than in any other period in the last twenty or so years. I suspect the impact from this competition won’t stop there; we’re likely to see material second-order effects as well.