As another summer fades into the review mirror, I think back to all those family vacations my wife and I took our kids on and the all too familiar question that came every year as we got closer to our destination (and the end of my patience); “Are we there yet?” And just like how we never seemed to get to that destination fast enough, the banking industry just can’t get to a place of deposit stability fast enough either.
In 2022 and 2023, the Fed increased the target Fed Funds rate by a total of 525 basis points. Those moves were aimed at tempering the overheated economy in the wake of the COVID pandemic. As a result of those increases, we saw massive shifts in deposit balances as consumers became more aware of opportunities to move balances from lower yielding non-maturity deposits into higher yielding CDs and alternative investment products. Now, as the Fed has begun cutting rates, depositors are actively looking both inside and outside their bank or credit union for the highest rate(s) they can find, significantly impacting financial institution liquidity levels and planning strategies.
What do massive shifts in deposits, economic uncertainty, and falling interest rates have in common? The potential to wreak absolute havoc on your institution’s liquidity position. One unplanned or mismanaged situation could mean falling out of policy limits, or worse.
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.
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.