The tight labor market has banks under pressure. Banks are having to raise wages to attract and retain staff while at the same time trying to meet investor demands to keep costs down, American Banker reported.
"This is a tough situation for banks," said James Chessen, chief economist at the American Bankers Association.
Because of the challenges banks face making money in today’s low interest rate environment, they’re already under pressure to cut expenses and generate revenues, the report said. Many have been making significant investments in technology upgrades to increase efficiency and upgrade their products and services.
"In the banking business, efficiency matters and being cost-effective matters," said Darren King, chief financial officer at M&T Bank in Buffalo, New York.
Banks are effectively operating in a zero-percent unemployment environment, Bob Shaffer, director of human resources at Fifth Third Bank in Cincinnati, said in the report. "The competition for talent is high," he said. "I think we’re going to be in a very low-unemployment-rate environment as we go through the year and into next [year] so we will continue looking at our compensation practices in order to be the best in line to attract and retain top talent."
Premium on talent
Labor costs are the single largest expense for banks, comprising almost 60% of banks’ total non-interest expenses in 2019, the report said.
Salary and benefits cost banks almost $60 billion in the third quarter of 2019, an increase of more than 18% from the same period five years earlier, according to Federal Deposit Insurance Corp. (FDIC) data.
Although the tight labor environment is driving the increase, public debate around wage inequality is also putting pressure on bank executives to show they’re trying to do something about it, especially in light of the big tax cuts enacted in the 2017 Tax Cuts & Jobs Act.
After the law took effect, the report said, a number of banks said they would raise wages and, in some cases, pay bonuses to wage-earning employees. JPMorgan Chase announced plans to increase its minimum hourly wage to between $15 and $18, Bank of New York Mellon to $15 and Bank of America to $20.
"Who knows where wage inflation ends up through 2020?" said King. "If the unemployment rate stays this low, who knows where we will end up?"
Analysts at Janney Montgomery Scott said they expect non-interest expenses among 100 public banks they analyzed to rise 3.64% this year — which just happens to be almost exactly what the U.S. Bureau of Labor Statistics says was the nationwide unemployment rate in January.