Report looks at impact of inflation on banks, separated by 50+ years

A comparison of how lending and bank performance during the stagflation periods of the 1970s and recent high inflation with a focus on the effects on deposits is the topic of the latest report from the federal insurer of bank deposits.

According to the Federal Deposit Insurance Corp. (FDIC), its report on “Implications of High Inflation for Banking Outcomes and Deposit Flows: Observations From 2021 to 2022 and the 1970s” asserts that persistent high inflation affects banks in various ways as monetary policy tightening and macroeconomic changes occur.

The report compares the experience of banks 50 years ago to recent history. In the 1970s, the report states, the nation experienced two periods of stagflation: high inflation and sluggish or negative economic growth and high unemployment. In 2022, the report asserts, inflation reached its highest level since the early 1980s, but economic growth and employment remained solid.

The FDIC said the report holds three key findings:

  • Loan growth and loan performance differed between the two periods. They depended more on broader economic conditions and the specific circumstances than on inflation.
  • Robust deposit growth in the 1970s suggests that banks were actively seeking deposits, while in 2021 to 2022, banks generally were flush with deposits because of varying pandemic support programs.
  • The differences between the two periods illustrate the importance of considering broader macroeconomic conditions when analyzing the effects of inflation on banks.

FDIC Quarterly Report Compares the Effects of High Inflation on Banks in the 1970s and the Recent Period