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.
Tag: Liability Management
As a general statement, banks offer too many options for certificates of deposits (CDs). Consider that the average bank offers 12 different maturities, some “specials,” plus several different tiers of pricing within each maturity. We have seen banks with as many as 42 different CD options which is inefficient for every party. The problem is too many CD offerings can increase a bank’s cost, confuse its customers and, worst of all – damage its overall deposit performance. In this article, we look at a counterintuitive strategy for increasing deposit performance.
At a recent Community Bankers of Georgia convention, a late night argument ensued over which banks are going to present the biggest deposit challenges for the next year. Now, granted you have to be a banking geek to really care about this on a Friday night, but it is an interesting question as the answer could help your bank more effectively defend its deposit franchise. In this analysis, we turn to the data to construct a “Deposit Threat Score” to hopefully provide your bank with insight into what your deposit future could hold.
It was the famous England vs. France chess match back in 1834, where the French opened with a simple, yet potent attack. England came out moving a pawn to the center of the board. The French stopped the pawn’s advanced and then used the combination of their bishop, rook, and knights to counterattack England’s exposed players. The set of moves have become known as the “French Defense” or “The French” and is one of the most popular opening moves in chess.
Pricing any deposit product breaks down into two distinct categories. There are the technical aspects of pricing your deposits to optimize volume, duration, and convexity and then there are aspects of marketing economics. Masters of deposit pricing must understand both.
Happy tax day! We actually don’t know how you feel about tax day, so if you are grumpy about it, we apologize. However, as a banker, you should be positive on the subject. Taxes, no surprise, are an excellent inducement to engage customers with financial leadership. Tax strategies, savings, and future planning are all anxieties that drive customers, and potential customers, to research. Proactively seek inquiries, and your bank is likely to reap tremendous rewards.
Money-market mutual funds have been one of the most popular products for investors but recent changes have made the product less so. A couple years ago (HERE), we wrote about the tactical opportunity that banks had for capturing inexpensive deposits from institutional and corporate investors. The tactic worked beautifully as banks that focused on pitching their money market deposits and CDs saw an influx of funding back in late 2014 and 2015.
There is a recent trend that we have been monitoring of banks offering a mid-priced business checking account that is designed for borrowers that are small but have high transaction volume. M&T Bank, for example, was the latest bank to roll out such an offering. A high transaction checking account can be offered to customers that have high transaction volume and more sophisticated treasury management needs but don’t want to move into full analyzed checking.
Usually, in the face of rising rates, banks increase their early withdrawal penalties in an attempt to stem customers from requesting their money back early so that customers can reinvest at higher rates. Increasing withdrawal penalties serve to increase liability duration and help bring convexity closer to zero. In a rising rate environment, this is exactly what you want as a bank. Oddly, banks are doing the opposite.
Early Withdrawal Penalties Are Shortening