Liquidity Sources By Natalie Regan   The average bank balance sheet has shifted considerably this year just as rates have.  We started the year with most banks still having a decent amount of liquidity.  Rates began to rise just before 2nd quarter and the outlook wasn’t too bad.  Economic factors both domestic and abroad changed a few things.  Now with the combination of loan demand in the first part of the year and continued inflation on goods and services for consumers, excess bank deposits continue to dry up.   Despite these shifts in liquidity, we believe banks are well equipped with a toolbox of sources if needed.  Certain sources can be more expensive and cumbersome than others and all have varying terms and implications on the overall balance sheet. Federal Reserve Bank repo, correspondent bank lines and the Federal Home Loan Bank are common sources of quick liquidity.  One caveat that can be a disqualifier for some borrowers is that these are all collateralized lines. The next source bankers may look to when short term borrowing is either not an option or they are looking for longer term funding is the bond portfolio.  Selling bonds at a gain or loss is a common practice as we move through ups and downs of rate cycles.  Last month alone, key tenors along the treasury curve moved 75-100bps higher in yield which has increased unrealized losses on all fixed income portfolios.  These unrealized losses are used in capital ratio calculations which is causing pain for some bankers at the moment.  But at the end of the day, the silver lining is that they are unrealized.   Taking a loss on a portion of the bond portfolio can be a good and necessary move at certain points of a cycle. The give up yield and percent of loss should be taken into consideration and compared to rates on other funding sources. Brokered deposits are one example to consider when evaluating this. Brokered deposits or Brokered CDs can be a great way to raise funds within a few weeks while maintaining the control of the terms and in certain cases the optionality.  The terms are agreed upon prior to funding.  Call features, optionality, can be added for a minimally higher rate and your bank can call (or not) when the time is right.  No collateral is used upon issuing brokered CDs but they should not exceed 20% of a bank’s total assets. Non-money center banks have recently been able to issue CDs at levels 0-45bps over the corresponding treasury in terms of 3 months to 5 years.  These levels have in some cases beat the losses banks considered taking in the bond portfolio.  We recommend adding this option to your liquidity line up.  We are here to help when you need us.

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