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Liquidity Crunch

By Brian Schaff
 
The Federal Reserve hiked their benchmark rate again last month at the March meeting, and it turned out to be a more contentious decision than they’ve faced for some time. Economists, market experts and talking heads debated what the Fed would do leading up to the meeting, which arrived on the back of high profile bank failures all while inflation remains well above the 2% target. The significance of the Fed’s latest move was reflected in the differing opinions on which direction they should be heading. And although the troubles of Silicon Valley Bank and Signature Bank were very unique, tightened bank liquidity in the wake of a historically aggressive hiking cycle has affected us all.

Liquidity remains top of mind for many bankers for a few reasons. Inflation has taken a bite out of consumer purchasing power, leading to fewer funds in checking accounts. Businesses are facing higher costs as a tight labor market has driven up the price of hiring and retaining employees. Meanwhile, decades high interest rates experienced in the past six months have lured excess dollars away from lower yielding accounts.

Thankfully there are a few options to help with a liquidity crunch. The Fed Discount Window and FHLB advances are being used, but if those are your only liquidity sources you’re missing out on credit diversification and potentially cheaper funding.
 

  • Brokered CDs are one source that banks have turned to recently. Although relatively simple and quick, tread carefully in this space. The shape of the yield curve has kept short rates expensive to issue, and longer termed CDs risk paying above market rates if and when the cycle turns. The increasing premium paid for callable issuance has recently widened spreads between fixed rate and callable CDs as well.

  • Selling bonds out of the portfolio, specifically Treasuries and municipals, can be a great way to raise money. When deploying this strategy, consider the take out yield versus other costs of funds. Just since the beginning of March, the two year Treasury yield is down over 120 basis points, helping reduce the amount of loss taken on a sale. Banks buy Treasuries in part because of their marketplace liquidity, so don’t be afraid to use it if the numbers make sense. As for tax free munis, we continue to see the strongest bids for higher coupons in the short to intermediate range of the curve, about 2-7 year maturities.
  • The Bank Term Funding Program (BTFP) emerged as a result of the aforementioned bank failures. This program is available to any FDIC insured deposit institution and allows borrowing on the par, not market, value of eligible collateral pledged by the eligible borrower. Eligible collateral includes securities able to be purchased and sold by the Federal Reserve during normal market operations (Treasuries, Agencies, government backed MBS) owned by the eligible borrower as of March 12, 2023 or earlier. The rate on the advance is the one year overnight index swap rate plus ten basis points, and the rate is fixed on the day the advance is made. Termed up to one year, no fees, no prepayment penalty even if refinancing. Additionally, participating institutions will remain anonymous for two years from the start of the program.
At Country Club Bank, we understand your concerns, because as a community bank we’re dealing with the same environment ourselves. Please reach out if you have questions or would like to know more information.


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