Academic journal article ABA Banking Journal

The Deposit Challenge: More Than Funding

Academic journal article ABA Banking Journal

The Deposit Challenge: More Than Funding

Article excerpt

IN AN ARTICLE WE PUBLISHED four years ago, consultant Ed Furash asked a group of bankers if they thought deposits were a "wasting annuity." None did. Judging by the comments reported in our cover story this month, we think most would agree with that assessment now. And yet for all the efforts made to diversify revenue streams away from net interest margins, the fact is the industry is still highly dependent on this source of funds. Thus it is that "funding/deposit growth" emerged as the top issue for next year among the bankers we surveyed.

The deposit crunch clearly hits small and mid-size banks hardest. Because of that, ABA just formed a task force of community bankers to explore the extent of the funding squeeze and possible remedies (see p. 8 for more details).

But while large banks are less dependent on deposits for funding than their smaller counterparts, they also face new risks related to the increased cost and volatility of nondeposit sources of funding. In the cover story, a CEO from a top 25 institution said attracting funds from nondeposit sources shouldn't be a problem, provided you keep your credit rating at the top. His proviso was well taken. Consider that if the economy continues to soften and asset quality takes a nosedive (which not coincidentally was among the top ten concerns for next year), then credit ratings are likely to suffer, and the cost of capital likely to climb. In fact, Wall Street has already pounded the shares of institutions reporting credit problems this year--stalwart Wachovia Corp. among them, as reported in the feature on page 41. …

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