Plansmith Blog

Over the last decade and a half, there has been a sort of dance when it comes to deposit stability. Following the Economic Crisis, we saw a massive “surge” of funds into banks and credit unions as depositors sought safety and a place to “park” money until better returns were again available in the market. In early 2020, after market rates had jumped a bit, I crafted a blog declaring the death of surge deposits, but then quickly had to shift as we saw a new round of “surge deposits” following the Government’s release of trillions of dollars in Covid-related Stimulus funds. Then, as deposit rates shot up in 2023, we saw a massive movement of funds from low-cost checking and savings deposits into higher-yielding CDs and MMDAs. Now, as we near the end of 2024, we’re left with a lot of deposit-related questions. Specifically,

• Is this period of deposit migration finally over?
• How stable are our remaining deposit balances?
• Were our IRR model deposit pricing and decay assumptions right, and/or do we need to make changes in light of historical performance and/or future expectations?
• How much impact do any of these assumptions really have on our model results?

To help answer those questions (ones examiners will certainly be asking), we’d strongly suggest that you be sure that your asset liability management program includes backtesting, sensitivity testing, and decay rate and deposit trends studies.

In the last two years, the Fed has implemented 11 increases in the target Fed Funds rate, amounting to a total of 525 basis points. These moves were aimed at tempering the overheated economy in the wake of the COVID pandemic.
As a result of these increases, we have seen massive shifts in deposit balances as consumers have become more aware of opportunities to move balances from lower yielding non-maturity deposits into higher yielding CDs and alternative investment products. While we can’t be sure of what future market rate movements will be, or when they will occur, every financial institution must be prepared for any outcome.

Considering this era is marked by economic uncertainty and rapid shifts, understanding liquidity's critical role continues to be paramount. Here are three key reasons maintaining a strong liquidity risk management program in 2024 and beyond is not a suggestion, but a necessity for community banks and credit unions.

What do massive shifts in deposits, a possible impending recession, and a tremendous hike in interest rates have in common? Absolute potential for wreaking havoc on your institution’s liquidity position. One unplanned or mismanaged situation could mean falling out of policy limits, or worse.

Before we dig into what the present state of the economy could mean for your organization’s liquidity position, let’s make sure we’re on the same page with what we’re discussing. Per the OCC, “Liquidity is the risk to a bank's earnings and capital arising from its inability to timely meet obligations when they come due without incurring unacceptable losses. Bank management must ensure that sufficient funds are available at a reasonable cost to meet potential demands from both funds providers and borrowers.”

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.

What do a massive uptick in deposits, a possible impending recession, and a tremendous hike in interest rates have in common? Absolute potential for wreaking havoc on your institution’s liquidity position. One unplanned or mismanaged situation could mean falling out of policy limits, or worse.

Does your organization have the IRR and Liquidity knowledge it needs to succeed?

Regulatory guidance emphasizes the importance of effective corporate governance and outlines expectations for both board members and senior management personnel. Specifically, interagency guidance identifies the board of directors as having the ultimate responsibility for the risks undertaken by an institution – including IRR and liquidity.

As you may have seen, in February we did a webinar on recent changes in the way Regulators are evaluating funding risk and the new measurements they are using to assign the “L”-Liquidity rating. As we noted, their focus has been on brokered deposits, “potentially volatile funding sources,” and “high rate deposits.” We pointed out numerous weaknesses in the way these funding sources are being assessed and limited.

Another great year has gone by, the stock market notwithstanding. With the number of banks and credit unions continuing to shrink, the cream is rising to the top. The quality of the remaining institutions is getting better.