Plansmith Blog

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.

It was only two months ago we released a blog discussing the critical role that liquidity management will play in 2023. Fast forward to now, and two financial institutions have been closed due to, at least in part, funding imbalances – the first banks in three years to fail. Although liquidity and interest rate risk often take a backseat under stable economic conditions, times like these require you to take an in-depth look into your asset liability management program to ensure you have a plan to both meet funding needs and stay in compliance with regulatory expectations.

Establishing and maintaining a sound interest rate risk (IRR) program is crucial to ensure proper balance sheet structure and comply with Regulatory expectations. During my 20+ years as a senior FDIC examiner, I routinely saw organizations experiencing issues with their ALM/IRR practices, ranging from loose misunderstandings of the guidance to critical errors that put the health of the organization at risk. Unfortunately, in my current advisory role, I see the same issues all too often.

For six wonderful years, I’ve had the privilege of being a part of Plansmith’s marketing team. From marketing assistant, to department manager, to my most recent role as Director of Marketing, I’ve experienced firsthand how important our company’s mission is: improving planning. Why? Because there is nothing more frustrating than having a brilliant idea with no real way of making it come to fruition. However, with incredible people and a quality plan, anything is possible – and doable.

Like many of you, I notice how important the planning process is when I’m putting together my ideas for next year. Though a marketing plan is a bit different than financial institution planning, the core concepts are the same.

Regulatory guidance states that the board of directors has the ultimate responsibility for the risks undertaken by an institution – including interest rate risk (IRR) and liquidity management.

The board is typically made up of a diverse group of individuals from varying backgrounds and career paths. Unlike most positions within a financial institution, a board member does not necessarily come from a banking background. One board could easily include a local entrepreneur, a farmer, a financial planner, a retired financial institution CEO, and a local insurance agent; while another board could be comprised of almost all former bankers. It’s often the most differing group in a similar role across financial institutions – so, since one size does not fit all, how do you train directors for their position on the board?

Is IRR and Liquidity Cash Flow Model Outsourcing Right for You?

That is a question a lot of CFOs and Presidents struggle with. Here at Plansmith, it really doesn’t matter to us whether you run the model yourself, or you outsource it to us. In fact, we have many clients on both sides of that fence, and even some that do a little of each. We just want you to be comfortable with whichever option you choose, be confident in your model results, and be sure your ALM process will pass the test at regulatory exams.

Times are strange. We haven’t been in our Plansmith offices together since March 16^th. That’s over a hundred and sixty days – it feels crazy. But like with anything else, we adjust and move forward to reach our goals, but the plans for getting there have definitely changed.

We still want to get together with everyone. We still want to talk about what works, what doesn’t, and how things are going. Even though we can’t meet face to face at our Schaumburg offices this year, we can still come together virtually!

Do you have appropriate policy limits for all key interest rate risk measurements? How did you set your set them, and do they really still make sense for your institution?

When market rates weren’t changing, most institutions were in general compliance with policy limits. However, with the steady ramp up of rates through mid-2019, and then the massive drop in March of 2020, we’ve seen numerous financial institutions fall out of policy compliance. We’ve also heard from many of our clients that just aren’t sure what they should use for limits for the various non-parallel rate shock scenarios and now emphasized net income shock measurements. The old industry standard limits that so many institutions are still using just don’t seem to be working anymore.

For the past ten years or so, surge deposits have been a material issue in asset/liability management. At the time of, and following the 2007-2009 Great Recession, the banking industry saw a substantial influx of deposits as real estate and equity investors liquidated positions and sought safe places to store their money and ride out the storm. The impact of this flight to safety was compounded by Government sponsored initiatives such as the Transaction Account Guarantee (TAG) Program and increases in Federal deposit insurance levels.

As a result, banks experienced significant deposit growth, and while these surge deposits would have normally been seen as a good thing, the near evaporation of loan demand left many banks with far more deposit dollars than they could effectively put to use. In turn, market liquidity levels skyrocketed, but margins were compressed. For the purpose of this article, we’ll refer to these funds moving from real estate, equities, or any other investments into the banking system as Type I Surge Deposits.

I know my numbers, but how do I communicate them to others within my organization?

Everyone relates to numbers, no matter who you're talking to, but not everyone reads them in the same way. So, how do you make the most out of your conversations with everyone who needs to relate to the same numbers?