In our last blog, we reviewed ZIRP (zero interest rate policy) strategies deployed by various central banks. We discussed how ZIRP strategies had been deemed by many economists to be ineffective over the long-term to stimulate economic growth and stoke inflation.
Last week (HERE) we looked at how deposit account tiering is used, some of the objectives that banks might employ and the effectiveness of tiering in total. As discussed last week, many banks tier without objective, without data, and without supportive marketing thus rendering the methodology worthless and possibly hurtful.
We are working with numerous community bankers to develop strategies for instituting floors on commercial loans. The idea of protecting floating or adjustable rate assets is not new to community bankers, but the current interest in this concept is spurred by specific and unusual communications and market developments that are worth analyzing.
Because of tradition, we tier our deposit accounts according to size. For a typical bank, their money market accounts often have six tiers ranging from $2,000 up to $100,000. The question that always comes up is - do you have the right tiers and the right number of tiers? Are you using your tiers to drive profit giving low rates or are your tiers just serving to confuse your customer and drive up operational cost?
On October 30, 2019, the FOMC decided to lower the target range for the Fed Funds rate to 1.5% to 1.75%. The decision was not unanimous, and two members voted not to lower the target range. In the FOMC statement and at the post-meeting news conference, the committee’s communication was clear in that the future path of Fed Fund rate will be data-dependent, and the indication is that the “mid-cycle adjustment” is done. The key takeaway is that rates may move up or rates may move down in the future depending on economic developments. The question for many bankers and borrowers is how to v
Community banks face intense competition from different institutions and various industries. There is currently a market phenomenon that is creating an unusually challenging environment for community banks that compete for real estate financing. This phenomenon is creating an advantage for some lenders in the amount of seven to 42bps, and community banks must be aware of this aberration if they want to win more quality borrowers.
Bankers should consider the shape of the yield curve when structuring and pricing loans to maximize return and reduce risk. The shape of the yield curve can also help lenders understand borrowers’ needs and better position the bank against competitors.
Every year we analyze the historical cost of funding earning assets (COF) for all banks in the country. We perform this analysis on every bank from 1990 to the present to understand the drivers of COF, how banks can improve performance by controlling their COF and how funding costs will behave in the future.
Funds transfer pricing (FTP) has been an important tool for financial institutions for several decades. The methodology was introduced to banks in the early 1980s to help allocate corporate costs among business lines. Since then, the mechanism has been central to also helping allocate risk among business units. For instance, if your bank has interest rate sensitivity, what portion of the risk is driven by fee lines (f.e. mortgages), loans and deposits. In this article, we look at the concepts of FTP and detail how banks can use the methodology to better manage risk.
Go to any bank conference, bank investor gathering or analyst meeting and the hot topic is the slowdown in deposit growth. As the economy keeps rolling and the Federal Reserve continues to raise rates, the topic of a bank’s increasing cost of funds, slowdown in deposit growth and the jump in liability interest rate sensitivity are on everyone’s minds.