The following article outlines some of the considerations that should go into managing funding pressure. This was provided by Sandler O’Neill + Partners, L.P. shortly after they gave an in-depth presentation on the same topic.

How to Manage Funding Pressure?

I. Market drives deposit pricing – the Federal Reserve is just one factor:

A. Pay attention to banks raising capital and whether they are looking to grow aggressively
B. Keep an eye on mergers and acquisitions: Core Deposit premiums are on the rise
C. Follow your top ten competitors: Loans/Deposits, Securities/Assets, etc.

II. Where does the pressure come from?

A. Decade-long decrease in CD concentration: It is not just about the beta; it is also about the deposit mix – Will this trend continue?
B. MMDA balances are up (typically with the number of accounts down)
C. Uninsured large balance MMDA: Could have a beta greater than 100%
D. Regulators want on-balance sheet liquidity: Focusing on “Cash and Unencumbered Securities/Assets”

III. Strategies being utilized:

A. Pre-crisis CD specials: Will this strategy have the same impact today?
B. Deliver products that your clients want

1. MMDA deposit products linked to Fed Funds:

a. Create your own beta (ex. 75% of the market move)
b. Great marketing tool: Your clients know that the Fed is raising rates
c. Manage interest rate risk: Eligible to be hedged

IV. What needs to be explored?

A. Construct a liquid and cash-flowing bond portfolio: Volatility in the market means that you want predictability
B. If and when wholesale funding should be utilized: Ensure that your institution has a Contingency Funding Plan in place
C. Understanding new hedge accounting simplifications: This will change the competitive landscape

Scott Hildenbrand
Principal/ Chief Balance Sheet Strategist
Sandler O’Neill + Partners, L.P.
212-466-7865
bankstrategyinsights@sandleroneill.com