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Friday, April 13, 2018 |
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MANAGING DIRECTOR: |
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US Treasury Market |
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| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 4/6/18 | 1.68 | 1.73 | 1.91 | 2.06 | 2.27 | 2.40 | 2.58 | 2.70 | 2.77 | 2.89 | 3.01 |
| 4/9/18 | 1.67 | 1.76 | 1.93 | 2.08 | 2.29 | 2.43 | 2.60 | 2.72 | 2.78 | 2.89 | 3.02 |
| 4/10/18 | 1.63 | 1.74 | 1.93 | 2.09 | 2.32 | 2.45 | 2.62 | 2.74 | 2.80 | 2.89 | 3.02 |
| 4/11/18 | 1.64 | 1.73 | 1.95 | 2.09 | 2.32 | 2.45 | 2.62 | 2.72 | 2.79 | 2.87 | 2.99 |
| 4/12/18 | 1.65 | 1.75 | 1.95 | 2.11 | 2.34 | 2.49 | 2.67 | 2.78 | 2.83 | 2.92 | 3.05 |
Source: U.S. Department of the Treasury, as of 4/12/18
A Quick Glance at “Adequate Liquidity”, yet again
We discussed this topic a few months ago, but we continue to see questions about liquidity surfacing in many exams throughout customer base. No surprise, but banks with high Loan/Deposit ratios (and especially those with substantial AG exposure) face heightened scrutiny. It seems the inquiry is also expanding to banks with less leverage as deposits are becoming harder and more expensive to retain. So, be prepared. Regardless of how much liquidity you believe is appropriate, it might not be enough to secure the treatment you think you deserve.
First, compare “on balance sheet liquidity” to the bank’s policy guideline. This is of course simple enough, but think about the guideline in the context of the loan/deposit or loan/asset ratios. A bank with a 95% Loan/Deposit ratio with a guideline of 10% may be “suspect” but not have issues. A deposit “blip” that produces a single digit liquidity ratio is likely to draw scrutiny.
In reality, it is difficult to pinpoint an acceptable liquidity target without thoroughly understanding cash flow generated by the loan and investment portfolios as well as the mix and nature of the bank’s funding. A retail funded bank utilizing “home grown” deposits at local rates is vastly different than one relying on wholesale funding. Net non-core funding to L/D ratio or loan/asset ratio is a good starting point. Funding with wholesale resources that are greater than 25% of total assets will likely be questioned. Any wholesale source that is greater than 10% of total assets are also likely to be reviewed.
Keep in mind brokered CD’s are considered wholesale of course, while Quick Rate CD’s likely will not be considered wholesale. Even with Quick Rate CD’s you might warrant a wholesale “tag” if you are offering rates substantially greater than you are offering in the local retail market. Fed Funds borrowed or overnight FHLB advances are also, of course, considered wholesale funds.
Another increasing point of emphasis are the results of a “liquidity stress test”. This exercise reduces retail CD’s and transaction accounts by 20% and all brokered deposits by 100%. Plus, borrowing lines from correspondent banks and the FHLB are curtailed 75% and 50% respectively. Not surprisingly, many wholesale funded banks that have acceptable liquidity ratios initially, show negative results (balances) in the longest time period of 181-365 days.
A positive cash flow post-stress still requires an updated and viable Contingency Funding Policy that specifically outlines the ability to raise funds. Typically, funding steps would include the sale of unpledged securities without taking a loss, FHLB borrowing lines and the availability of brokered CD’s. There are of course other sources available to some banks.
In conclusion, review liquidity in the “big picture” by identifying cashflow needs and sources of funds in the context of “normal” as well as stressed situations. If non-core funding is an issue try to develop a long term plan to reduce wholesale dependence (easier said than done). Lastly, identify any “alarm bells” that might signal funding issues going forward and formulate a response. Thinking ahead is the key to comprehensive liquidity management.
If we can help, call AMG at 800.226.1923.
This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.
•Not FDIC Insured •No Bank Guarantee •May Lose Value