How stable are your deposits?
I am attending the Financial Managers’ Society (FMS) Forum in Las Vegas this week. The Forum is chock full of education opportunities for banking finance professionals. One session caught my attention. The tandem speakers taught the audience about going “long”, or at least longer, in their investment portfolio and minimizing risk.
One of the underlying assumptions in advising to “go long” was that core deposits were as stable today as they were four years ago. I challenge that thinking. Average balances per account among most core deposit categories have been growing and I think customers are parking their money waiting for greener pastures. When they arrive, what will they do with that money? I put this question to Dallas Wells, an asset-liability specialist from Asset Management Group in Kansas City. I have followed Dallas’ writings on his informative blog for a while now and caught up with him at the Forum. Here is what he had to say.
What do you think will happen to core deposits once rates rise?
7 thoughts on “How stable are your deposits?”
I'll be the first to admit I'm not a deposit guru or advisor so I apologize in advance if my thoughts are off base. But common sense tells me that customers behavior changes during periods of stress. And with customer behavior being unpredictable I don't see how the advisors can have a top-down view and say all core deposits are stable, just look at the last 4 years. I agree that there's probably a large pool of deposits that are stable but things change over time; and so will the customers behavior. Some are price sensitive but I'm sure some are also sensitive to other factors, e.g. employment, that can influence their behavior and/or decision to their deposits elsewhere. It seems to me that with this whole new trend in marketing segmentation and understanding consumer behaviors and their transactions (or account behavior) that more customer insights isn't used to help manage the investment portfolio. Maybe it is already and maybe these advisors discussed it in their session but to say deposits have been stabled for 4 years is not an assumption I would hedge my bets on.
Invictus, which devises stress tests for banks, estimates that the bulging checking and savings accounts across the industry contain $1.28 trillion of hot deposits—the trouble with that being banks are not recognizing this influx of money as hot deposits. Once consumers and business customers regain faith in the economy, they'll redeploy their cash into higher-yielding investments, which will cause major woes in asset/liability management for banks. Similar to what Dallas Wells says in the video above, Invictus suggests banks look at their historical level of core deposits to better gauge how much of their current deposit base is stable.
In our annual list of "Big Ideas" for American Banker Magazine, we made the second big idea for 2012 "Plan wisely for the eventual cool down in hot deposits": http://www.americanbanker.com/magazine/122_1/12-big-ideas-for-2012-1044896-1.html
I think both Bonnie and Lee are correct in considering the "new" money as "hot" money as it is likely to outflow to some degree either inside the bank as CD's (as Dallas says) or outside the bank.
The Fed estimating how long they will keep rates low is concerning bankers about long term margin decline, so it puts pressure on treasurers to extend their bonds to reach for more yield.
I think those with the pragmatic approach to keeping a fair dose of liquidity will experience more margin decline in the short run, but will be better off because they have liquidity to manage their outflows so they don't have to run CD specials on the way up to maintain liquidity.
Thank you Bonnie and Lee for your insights.
I don't think going back to pre-recession levels necessarily makes sense either when figuring your core base. It will be a balance as there has been or what appears to be a fundamental shift in the way people are managing their money and balance sheets. People are not as confident in the stock market and are moving away from volatility not towards it. The stock market and economy will need to prove itself again before people move their invest-able assets outside their retirement accounts into the stock market and other alternatives.
I agree Andy that people will be more comfortable with cash reserves than prior to 2008. But the big question is, how much will stay and how much will go?
As a professional student of human behavior as it relates to the selection of financial products by consumers, the essential motivators are still greed or fear. Given the severity of the current economic downturn it will take a prolong period time for those individuals whose economic wealth was severely impacted to change their behavior back to the pre-recession period when ATMs were used as automatic dispenser machine that fueled the exuberant Party? This was created by former Chairman Greenspan maintaining interest rates artificially low for an extended period of time. Sound familiar? Just ask someone who grew up during the great depression about their risk averse behavior. Younger customers who had were not severely will be tempted to take greater risk, however, the fundamental swift in the job market will not allow them to accumulate much wealth to take a significant impact. The stock market will increase not because the shifting of funds from bank deposits but the fueling of cash from employer retirement Plans continuing to shift from defined retirement plans to lower costing 401k. However, as interest rates rise banks, the perceived stability of core deposits will be a fallacy not because movement of funds not to the stock market but internally or to other banks who will be offering the highest rate of interest that is insured by the FDIC. Community banks should be lobbying against the TAG program and limit FDIC insurance back to 100 k. This will force consumers to evaluate the risk profile of their uninsured deposits at each bank, since now they will have skin in the game instead of simply moving their funds to the bank offering the highest rates. For those consumer that are risk averse, this will result in spreading their funds among different banks to have the appropriate coverage. This in turn, will be beneficial to smaller community banks as customers will spread their funds to a multitude of financial institutions. Yet high flying institutions which offer the highest rates (I.e. ally bank) will have a perceived risk since FDIC insurance will be limited. The best regulator is consumers been forced to make risk reward decision instead of having the proverbial unlimited free lunch. Government intervention into free market system changes the nature of human behavior many times in unintended consequences. I do believe that FDIC insurance is important and beneficial to the stability of the financial industry but too much of a good thing sometimes is injurious to the risk reward behavior of consumers. At the end of the day there is no free lunch, someone needs to pay for the party.
I think you are on to something regarding the decline in personal wealth over the past four years having a generational impact on risk and therefore financial product selection. I think the biggest risk to financial institution liquidity is the unknown.
Thanks for your comment.
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