Academic journal article ABA Banking Journal

NAVIGATING THE NEW WOALD OF: As Pressures on Bank Liquidity Increase, Industry Experts Offer Tips to Help Bankers Stay Afloat

Academic journal article ABA Banking Journal

NAVIGATING THE NEW WOALD OF: As Pressures on Bank Liquidity Increase, Industry Experts Offer Tips to Help Bankers Stay Afloat

Article excerpt

The landscape of bank liquidity is shifting.

Interest rates are on an upward trajectory, loan growth has been outpacing deposit growth for the past several years and bankers expect funding costs to increase in the months ahead.

In addition, competition around deposits is heating up. particularly as larger banks and digital bank players start to move in on community banks' retail deposit base. "Years of excess liquidity are behind us," notes Steve Kinner, senior managing director at Promontory Interfinancial Network, who recently spoke at the ABA Conference for Community Bankers in San Diego. "Depositors are open to switching banks."


With all of these forces at play, banks should be taking the time to assess and understand their liquidity position--what they have for liquid assets, assets cash, bond collateral and so forth.

Taking stock

While lending growth isn't a bad thing, bankers must ask themselves what the funding game plan is if liquidity remains under pressure. Conducting a thorough liquidity assessment to understand the bank's liquidity position is essential--and it's a prudent step to take from a regulatory standpoint, too. "We've been seeing a lot of examiner comments on liquidity management," says Joe Kennerson, managing director at Darling Consulting Group.

"As on-balance sheet liquidity levels continue to decline, it's going to pivot into all these strategy discussions," he says. "How are we going to fund loan growth in 2019? What's our deposit strategy? How aggressive are we going to have to be?"

Depending on the bank's liquidity position, those conversations will be different.

Banks that find themselves in a comfortable position with liquid assets may want to consider keeping cash invested and taking a more defensive posture on deposits. "I see some banks out there swimming in liquidity, yet they have a CD special at 2.75 [percent] because that's what everyone else is doing," Kennerson says. But he cautions that that may not be a winning strategy; ultimately, the bank may end up simply cannibalizing existing funds within its own deposit base--increasing costs rather than bringing in new money.

Meanwhile, banks that are tighter on liquidity may have to be a little more offensive with their deposit strategy, and seek alternative wholesale funding methods, such as Insured Cash Sweep or CDARS--which are endorsed by ABA--or letters of credit at the Federal Home Loan Banks. "If you're tight on liquid assets only because a lot of your bonds are being covered with sweeps or public deposits, that's easy," explains Kennerson. "If there are some alternative methods out there and you can insure those deposits through other avenues, that's a good way to artificially increase your liquid assets without changing the structure of your balance sheet."

Seeing opportunity in competition

As bankers engage in these strategy discussions, they must also factor in what's happening in their local market. For example, the current regulatory framework--particularly the Basel III regulations and the liquidity coverage ratio--are part of what's driving large bank competition for retail deposits, explains Promontory Interfinancial Network's Taylor Binder.

Under the LCR, "regulators want [the largest banks in the country] to say: how much runoff do we expect for certain types of deposits?" he explains. "Public funds get a 40 percent runoff rate. Financial institution money gets a 100 percent runoff rate. So you're seeing a lot of larger institutions that are moving away from some of these higher-runoff types of depositors, and they're focusing on retail deposits, because those only have a 3 percent runoff rate."

While this may be concerning to community banks--for whom retail deposits are often bread and butter--Binder adds that "it's also creating a lot of opportunities for community banks to go after those types of clients" that the larger banks may be pushing out the door. …

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