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Deposit Base Management-Once Again...Banking is a Cyclical Industry

May 18, 2016

By: Jim Swanson, CEO


In theory, the cyclical nature of the banking industry needs no repeating. In reality, human nature requires us to repeat many life lessons. Case in point: Ten years ago, before the Great Recession, a big challenge facing many banks was funding growth. Loan-to-deposit ratios were rising as was reliance on brokered deposits. Regulator concerns over reliance on noncore funding sources were also growing. 

The Great Recession changed this. A perfect storm of weak economic conditions, tepid loan demand, aversion to risk, higher FDIC deposit insurance limits, and loosened federal monetary policy resulted in sizable liquidity build-up that left many banks with totally different challenges relative to balance sheet and deposit base management. By year-end 2012, bank liquidity metrics nationwide had peaked. 

Since 2012, however, we have seen a slow but steady reversal of this liquidity buildup trend. Loan-to-deposit ratios nationwide are edging up again, as is the use of brokered deposits, while core deposit levels are retreating as a percentage of total deposits. Nationally and globally, economic uncertainty makes it hard to predict whether the industry is heading toward another liquidity crunch. But clearly, the Federal Reserve has an eye on raising interest rates over the longer term, and it has initiated efforts towards that overall goal. 

This hints at several interesting questions. For starters, how rusty are your deposit generation skills after a stretch of abundant liquidity? Your staff’s skills might need to be refreshed. For newer employees who have never been expected to sell deposit products, training and guidance might be in order. 

Next, how stable is your core deposit base under a rising rate environment? Many fixed-income depositors have quit shopping deposit rates over a few measly basis points in a list-less environment. Yet when rates climb, that could change—and expose more instability in core deposit bases than is currently perceived. 

Finally, has your bank adapted to changes in technology and the payment system in the years since you had to work up a sweat to gen-erate deposits? Technology is shaping what customers expect from their bank in terms of products and services. Also, millennials—the largest generation in the country—embrace technology at a much higher rate than prior generations. Your ability to build customer loyalty and a stable core deposit base will depend largely on your technology offerings.

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EMail: Jim@bankstrategiesllc.com