Will increasing funding costs squeeze bank deposits?

Market expectations now favor increasing interest rates and thus expectations around deposit cost pressures have changed. Many banks were hoping for continuing rate decreases to continue relieving funding cost pressures. With the market now expecting the Federal Reserve to increase the Federal Funds rate in the second half of 2026, this means that funding costs will stay flat for the moment and then rise with both rate increases and competitive pressures. If rates increase that means loan rates will increase and thus banks should be able to maintain net interest margin (NIM), however if loan demand decreases due to increased interest rates (loans become less affordable) then margins could compress with higher funding costs. This episode examined a series of articles from S&P Global Market Intelligence (subscription required).