If you have spent some time in men’s locker rooms, then you likely know about the unspoken “naked man right away.” This regulation in the man-code stipulates that the least dressed man goes first should your paths cross simultaneously in a locker room. If you have a towel on, for example, you yield to the guy with only hair gel. This regulation permits safe passage and prevents getting hit with random body parts which is awkward at best. We bring this up, because there is a similar unspoken rule when it comes to asset-liability management.
For banks, when it comes to asset-liability discussions and workshops, it is proper protocol to yield to the bank that has the larger “surge balances” flapping out there. Now, if you are going to tell us that “you don’t pay attention to another bank’s surge balances,” we say - sure you don’t, just like you are not looking around the locker room. The reality is many banks have surge balances and other banks plus the regulators are paying attention.
After 2007, many bank customers moved their investments out of equities, housing, bonds and other areas and placed them at banks. In particular, they placed them in money market accounts at banks. Our friends at FICast Data (Our outsourced ALM solution provider) helped us run Florida banks (including CenterState) to help illustrate this issue. While checking, interest checking and savings balances have been reduced since the downturn, money market balances have “surged” and have climbed from an average of $63k prior to 2008 to $103k, since 2008.
Further to this point, yesterday, the Association for Financial Professionals released their Liquidity Survey that showed that 36% of their members materially increased cash balances in the last year mostly as a result of increased cash flow (73%) and debt issuance (18%). Banks were the largest recipients of this excess cash with 52% going into deposit accounts – the largest percentage ever.
In the charts below, we have looked at several other ways to look at this phenomenon and have included average life and implied decay (in the future we will look at beta as that is another interesting story).
This is good information to know, as we are already taking steps to dampen the reverse surge should rates rise. Applying more marketing, restricting CD maturities, revising tiers on accounts, deeper cross-sell and moving to dynamic/segmented pricing are all steps that can be taken to aid in retention. If nothing else, we can at least plan for losing some of these balances which is always a favorite question from the regulators.
In addition, we monitor the situation which is a suitable solution when it comes to risk management. More precisely, we have indentified several banks around the country with a deposit offering line up and demographic structure similar to ours. These banks have exhibited material surge balances and will be our early warning system as when we see rates rise and their money market balances get reduced. This will be our sign to even take more aggressive steps.
Knowing who has the surge balances in the area (take a look at your peer’s money market balances over the past seven years) is as helpful as knowing who is the most naked in the locker room. If you are not paying attention, it can make for some uncomfortable moments in the future.
Submitted by Chris Nichols on July 16, 2014