For the past few years, I’ve written about the varying circumstances surrounding Surge Deposits. From “the death of” to the “resurgence,” it seems to be a consistently hot topic – this year, with a slight twist. While previously keeping a close watch on the influx of demand deposits, we’re now seeing increased pressure on funding flowing either from non-maturity deposits (NMDs) into higher costing CDs, or out of financial institutions all together.
Before we get further, if you haven’t yet read my other blogs discussing Surge Deposits, or could use a refresher, click here to do so.
Because rates continue to rise and consumers now have a variety of attractive investment options, organizations are presented with the challenge to predict customer behavior. Will they keep their funds in the same NMD accounts that their money’s been sitting in? Will they opt for an attractively-priced CD within the same institution? Will they move their funds to another organization all together? Or, will they venture to the US Treasury market, stock market, or some other alternate investment opportunity? In 2023 and beyond, the options are seemingly endless.
Regardless of “inward” surge or “outward” surge, regulators still want to see how your organization will account for these movements. With so many options, attempting to anticipate customer behavior is no small task. So, how does a financial manager keep a realistic pulse on the impact of this outgoing surge behavior on the liquidity, cash flow, and interest rate risk positions of the financial institution?
Surge Deposits: 3 Regulatory Expectations
- Consider the effect of surge deposits when setting decay rate assumptions
- Analyze their possible impact on liquidity as part of your regular stress testing and cash flow modeling
- Assess the potential impact on funding costs
Regulatory guidance states that as part of formulating decay rate assumptions, “banks should consider adjustments for qualitative factors to reflect current-period market conditions and anticipated customer behavior in response to interest rate fluctuations, for example by adjusting [for] the assumed runoff of surge deposits.” You will likely also be asked to expand your cash flow modeling efforts to include a stress scenario to show the potential run-off of these newfound deposits.
If you haven’t yet reviewed your deposit base and quantified the level of potential of deposit runoff, we can do it for you (and it's not expensive). You'll get complete documentation, including a 15-year deposit trend analysis, and then we’ll show you how to use the results to adjust your decay assumptions and cash flow modeling scenarios.
Have questions or ready to get started with an analysis? Email us and we can schedule a time to talk.
Dave Wicklund
Director of ALM Advisory Services