Academic journal article ABA Banking Journal

How Bank Funding Patterns Have Shifted

Academic journal article ABA Banking Journal

How Bank Funding Patterns Have Shifted

Article excerpt

Banks have experienced three distinct patterns of funding since the early 1970s. The first was the diminishing importance of large time deposits. Second was the rapid growth of small time and savings deposits in the early 1980s. Most recently, commercial banks have turned to eurodollars as a major source of funding incremental asset growth.

Liability Management emerged in the 1960s as money center banks and then regional banks entered the market for large negotiable certificates of deposit. The ability to tap money market sources of funds allowed banks to gain share of lending markets throughout the 1960s and into the 1970s.

Aggressive use of managed liabilities was constrained by Regulation Q ceilings which stipulated maximum rates paid for time deposits. As market rates exceeded these rates, banks experienced deposit attrition. Although the Regulation Q ceilings were gradually raised as the system migrated toward deregulation, additional problems ensued in the early 1970s as lending rates were constrained by the Committee on Interest and Dividends while market rates continued to rise.

Large time deposits comprised about 29% of incremental funding from 1970 to 1975. Despite the removal of Regulation Q ceilings, incremental funding from large time deposits dropped to about 7% in the first half of the 1980s.

That period featured the rise in popularity of small time deposits as a funding source. From 1980 to 1985, flow-of-funds figures suggest that about 55% of incremental funding was accomplished by reliance on small time and savings deposits. This figure was relatively unchanged in the latter half of the decade, as emphasis had shifted from large time deposits to small time deposits as the most popular incremental funding sources.

More recently, funds flows from foreign branches--eurodollars--have accounted for much of the increase in bank liabilities. Deposits from foreign branches grew from $39.1 billion early in 1992 to more than $220 billion in late 1994. In 1994, these deposits have represented about half of the incremental funding of the banking system.

In the last two years, transaction deposits (demand deposits, NOW accounts, and SuperNOW accounts) have grown rapidly. After representing a diminishing share of incremental funding during the period of high interest rates beginning in the late 1970s, these deposits have represented almost one-third of new funding, so far, this decade. …

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