The banking industry, including retail and investment banks, is subject to seasonal trends. Seasonality is most commonly associated with agricultural commodities and certain retail industries. The latter, for example, sees an increase in sales during the holiday season. The existence of significant seasonal variation in the demand for capital, the commodity a bank trades in, may seem surprising in a diverse, global economy with widespread, well-established capital markets.
While it's reasonable to assume that there are significant seasonal fluctuations in the funding and borrowing needs for specific industries, it would seem that the aggregate demand for capital across the entire range of individuals and industries would be relatively stable throughout the course of a year. However, there are easily identifiable seasonal trends for the banking industry, as measured primarily by the monthly volume of new loans.
- Seasonality, which describes the regular fluctuations in business areas within a typical year, is primarily associated with the agricultural and retail sectors.
- Capital is the primary commodity that banks trade in, as individuals and businesses require loans for financing purchases.
- Seasonality within the banking industry can primarily be noticed by the changing monthly volume of new loans.
- The typical seasonal pattern of the banking sector sees low points in January and February, with demand for loans increasing in March and peaking in August or September, followed by a drop till bottoming out in December.
- The change in interest rates is the driving factor behind any changes in demand for loans; as interest rates fall, the demand for loans will increase. Conversely, as interest rates rise, the demand for loans will decrease.
Seasonal Patterns in the Banking Industry
The basic seasonal pattern of the banking industry is a period of annual lows in late January and February, followed by an increase in loans that begins in March and rises sharply through July, usually peaking in August or September.
From there, demand for bank loans typically decreases till it bottoms out in December. The cycle starts again as the demand for loans remains low in January and February, starting to rise again. In the northern hemisphere, this is directly associated with the changing weather.
Factors Driving Seasonality in the Banking Industry
One factor driving this seasonal pattern for the banking industry is a corresponding seasonality in interest rates. Although this has not been the case in recent years, with the Federal Reserve keeping interest rates artificially low since the financial crisis of 2008, there has historically been a seasonal pattern for interest rates.
Rates tend to be lower in spring and fall, and higher in winter and summer, and corporations and individuals try to obtain major financing when rates are lowest. Spring is historically the prime home-buying season. This leads to a sharp increase in applications for home mortgages during March, April, and May.
However, the seasonality also depends on when interest rates actually change and they may change due to externalities that are outside of seasonality trends. If interest rates drop at a particular point during the year, one would expect to see an increase in demand for loans then. Conversely, if interest rates increase, one would see a drop in demand for loans.
If you need to take out a loan when interest rates are high, it is always possible to refinance when interest rates drop again.
For example, if a crisis results in a large negative impact on the economy in the fall, the Fed might drop interest rates to boost spending in winter, which would result in an increase in demand for loans outside of what is considered the normal time. The demand would also be dependent upon any forward guidance by the Fed; whether they indicate interest rate changes to be long-term or short-term, which would also affect how consumers and businesses will react.
Another factor that drives the seasonal pattern for the banking industry is the increased demand for investment services that occurs in December and the first part of January. This is the time of year when portfolio and fund managers do a lot of rebalancing and when individuals make significant investment adjustments, such as end-of-the-year or first-of-the-year moves designed to gain tax advantages.
Tax planning is also a factor in the demand for bank services and can be a factor contributing to the seasonal rise in activity that begins in March, just prior to the April 15 income tax deadline.
The Bottom Line
Seasonality is the regular fluctuation in patterns throughout the year witnessed in certain business areas. Though not typically associated with seasonality, the banking industry does experience seasonality as seen through the changes in business and consumer demand for loans.
Typically, the demand for loans is highest in spring and summer, steadily falling to lows in December. This continues in January and February until demand begins to increase again as spring arrives. That being said, the true driving force behind the change in demand for loans is the interest rate. Despite the time of year, if interest rates fall, loan demand will increase.
It is important for any individual or business that is thinking of taking out a loan to pay attention to interest rates as well as any guidance from the Fed on whether rates will increase or decrease in the future, thereby choosing the right time to take out a loan.