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Friday, August 17, 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 |
| 8/10/18 | 1.92 | 2.05 | 2.23 | 2.42 | 2.61 | 2.68 | 2.75 | 2.82 | 2.87 | 2.96 | 3.03 |
| 8/13/18 | 1.93 | 2.06 | 2.22 | 2.42 | 2.61 | 2.68 | 2.75 | 2.82 | 2.88 | 2.97 | 3.05 |
| 8/14/18 | 1.96 | 2.08 | 2.25 | 2.44 | 2.63 | 2.71 | 2.77 | 2.84 | 2.89 | 2.98 | 3.06 |
| 8/15/18 | 1.96 | 2.07 | 2.23 | 2.45 | 2.61 | 2.68 | 2.73 | 2.81 | 2.86 | 2.95 | 3.03 |
| 8/16/18 | 1.96 | 2.07 | 2.24 | 2.45 | 2.63 | 2.70 | 2.75 | 2.82 | 2.87 | 2.95 | 3.03 |
Source: U.S. Department of the Treasury, as of 08/16/2018
Liquidity is an Ongoing Issue!
As we have discussed several times in the last year or so liquidity is becoming more of an issue as loan demand continues to outpace deposit growth in many communities. Of course there are varying degrees of “need” but many banks have seen their Loan/Deposit Ratio steadily increase in the last five years as deposits have stagnated. Actually, funding per se isn’t the issue, it is funding in a manner that supports an acceptable liquidity ratio without blowing-up the Cost of Funds (COF).
In most cases the funding becomes a balancing act between increased interest expense associated with “retail” or core funding, versus the cost and the ability to add wholesale funds.
On the retail level the question is fairly simple, the solution is not. Can the bank “afford” to raise rates enough to bring in the needed deposits? First, make sure the true cost of proposed solutions is accurately measured. So, crank-up a spreadsheet to determine the “real” cost of each new dollar added. Keep in mind, trying to slip-in a new 13 month CD at 2.0% might raise some “new” money, but it might also trigger a landslide of shorter and perhaps even longer maturities migrating to the new rate. The marginal cost of “new” money might be astronomical sending the initial 2% offering rate to a far greater number. Plus we all know if the only relationship between the depositor and the bank is “rate”, the depositor is a “shopper”, and not a real “customer”.
An alternative to a CD might be a new tier (or reshuffling of the current tiers) in a transaction account, such as MM, Savings or NOW. At first blush this sounds anti-intuitive. Why put a relatively non-rate sensitive account in jeopardy. But this approach has worked for many banks that shoot for large balances (say, at least a minimum of 100k per deposit) with a rate of 1.5% or so. The freedom to use or move the deposit at will is mildly intoxicating to some depositors, but in the long haul they usually become quite “sticky”. Plus, if tiered properly, you run very little risk of polluting current deposits.
Wholesale funding is of course an option, but know where you stand before proceeding. 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 an 80% Loan/Deposit ratio with a guideline of 10% may have no issues, but, a “slip” that produces a single digit liquidity ratio will certainly draw scrutiny. It is difficult to quantify an acceptable liquidity ratio without examining the loan mix. And, the liquidity ratio and loan/deposit ratio must be reviewed in the context of funding sources.
Net non-core funding to loan/deposit ratio or loan/asset ratio is a good starting point. Funding with wholesale resources that are greater than 25% of total assets will be questioned. Plus, any wholesale source that is greater than 10% of total assets will most likely be reviewed. Keep in mind brokered CD’s are considered wholesale of course, while Quick Rate CD’s likely will not be considered wholesale. But, even with Quick Rate CD’s you might warrant a wholesale “tag” if you are offering rates substantially greater than you offering in the local retail market. Fed Funds borrowed or overnight FHLB advances are also, of course, considered wholesale funds.
In conclusion, review “funding” 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 some “alarm bells” that might signal funding issues going forward and formulate responses. 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