Bank Funding Survey Results and Analysis
Introduction In this challenging interest rate environment, banks continue to reevaluate their retail and wholesale funding strategies. Total Bank Solutions surveyed U.S.-based bank employees, asking them to anonymously provide information on how their bank leverages wholesale funding or what concerns prevent them from moving forward. Along with comprehensive survey result documentation, this report also contains our analyses of the results, including interesting correlations and unexpected conclusions. We invite banks to use this report to understand how peers approach the decision-making process as you align your own balance sheet with forecasted interest rates, your risk appetite and the profitability of your institution.
Highlights Key insights and correlations learned from survey responses.
1. Loan Growth and Wholesale Funding Needs On the Rise in 2018 The majority of banks are projecting a modest increase in both loan growth and wholesale funding needs for 2018. In today s rising rate environment, banks have experienced significant Net Interest Margin (NIM) compression. The flattening of the yield curve has caused many to look to alternative funding scenarios, including further diversification and yield-optimization via substitution strategies. 69% 52% Loan Growth 69% of banks are projecting a modest increase in loan growth for 2018. Projected Wholesale Funding 52% of banks are projecting a modest increase in projected wholesale funding for 2018.
2. 1 in 3 Banks Leverage Interest Rate Swaps Liability-sensitive institutes looking to lengthen the duration of their liabilities can utilize pay-fixed interest rate swaps as well as fixed-term brokered MMDA or brokered CDs, among other options. Moreover, institutions should be aware of the viability of writing interest rates against their brokered MMDA deposit balances. At TBS, many of our program banks employ such strategies towards best practices liability management. 35% of respondents utilize interest rate swaps to lengthen the duration of funding during the rising rate environment.
3. Top Three Decision Drivers Impacting both Wholesale Funding and Brokered Deposit Utilization Given the interest rate environment and relatively flat yield curve, seeing availability, pricing and stability as the top three drivers is not surprising. Brokered deposits represent a cost-effective, stable funding strategy that provide effective portfolio diversification while requiring no asset liquidity encumbrance, marketing or other overhead expenses. While brokered MMDAs are typically priced at spreads to the Effective Federal Funds Rate, pricing structures can be very flexible and allow for any index a bank may require. In addition, participation across multiple programs further increases the stability and availability of these deposits. Availability Pricing Stability
4. Pricing The top reason why banks don t utilize brokered deposits. Given pricing structures that ensure rates below other wholesale funding vehicles, these survey results imply that many of these respondents likely have sufficient retail deposit bases that preclude the need for wholesale funding reliance. In this scenario, we alternatively recommend an Insured Deposit Product (IDP) solution with rates consistently below prevailing wholesale funding vehicles. TBS provides weekly pricing sheets detailing these efforts. 48.28% of respondents ranked pricing as the number one item impacting their decision.
5. Regulatory Concerns Ranked high in both reasons for and against using brokered deposits. This is not too surprising; the FDIC s 2011 Study on Core Deposits and Brokered Deposits concluded that there was a high correlation between over-utilization of brokered deposits with bank failures. Of course, it was the way these deposits were used that ultimately caused certain banks to fail (i.e. the funding of toxic, poor creditquality assets). Since the financial crisis of 2008-2010, U.S. banks have consistently demonstrated increased prudential utilization of these deposits as part of an effective, diversified wholesale funding strategy. IDP solution providers must fully understand regulatory concerns surrounding over-reliance on brokered deposits and any wholesale funding vehicle, for that matter. Misconceptions and false correlations have created stigma in the past, but brokered deposits today are becoming a new norm.
Results Reported results from the TBS Bank Funding Survey.
Projected loan growth for 2018 Projected wholesale funding needs for 2018 Same as 2017 13.79% Significant Modest Decrease Decrease 0% 3.45% Signifcant Increase 13.79% Significant Increase 6.90% Modest Decrease 13.79% Significant Decrease 0% Same as 2017 27.59% Modest Increase 68.97% Modest Increase 51.72% As loan growth in 2018 increases, wholesale funding needs are more likely to experience modest increases.
Wholesale funding options currently in use or strongly considered for use The appropriate combination of the top two options is always closely aligned with internal policy limits. Brokered Sweeps (NOW/MMDA) FHLB Advances Brokered CDs Institutional CDs Municipal Deposits Repos Federal Funds Subordinated Debt Senior Debt Federal Reserve Primary Credit Foreign Deposits 68.97% 68.97% 62.07% 48.28% 44.83% 34.48% 31.03% 17.24% 13.79% 3.45% 0%
Wholesale funding options ranked by preference Items impacting wholesale funding decisions ranked 1 FHLB Advances 1 Pricing 2 3 4 5 6 7 8 9 10 11 FDIC Insured Brokered CDs FDIC Insured Brokered Sweeps (NOW/MMDA) Institutional CDs Federal Funds Municipal Deposits Uninsured Brokered Deposits Repos Senior Debt Subordinated Debt Federal Reserve Primary Credit 2 3 4 5 6 7 8 9 10 11 Availability Stability Regulatory Concerns Internet Rate Risk Diversification Collateral Requirements Loans/Deposit Ratio Asset Liquidity Internal Stress Tests Relationship (business, partner, affiliate, etc.) Brokered Sweeps, Brokered CDs and FHLB Advances are the most popular wholesale options by banks. As of Q3, system-wide brokered deposit balances are at $936 Billion, versus $575 Billion of FHLB advances. 12 Foreign Deposits 12 Liquidity Coverage Ratio 13 Net Stable Funding Ratio
Items impacting decision to utilize brokered deposits Items impacting decision NOT to utilize brokered deposits 1 Pricing 1 Pricing 55.17% More than half of all respondents ranked pricing as the top reason in favor of using brokered deposits. 2 3 4 5 6 7 Stability Availability Regulatory Concerns Diversification Loans/Deposits Ratio Risk Concerns 2 3 4 5 6 7 Regulatory Concerns Stability Risk Concerns Availability Loans/Deposits Ratio Diversification 8 Liquidity Coverage Ratio 8 Liquidity Coverage Ratio 9 Relationship (business, partner, affiliate, etc.) 9 Net Stable Funding 10 Internal Stress Tests 11 Net Stable Funding Ratio
The extent of which banks structure securities portfolios to provide cash flows as rates rise Concerns to banks, ranked by importance using the CAMELS acronym Above Average 17.24% Significantly 3.45% Not at all 17.24% 1 2 3 Asset Quality Capital Adequacy Liquidity 4 Earnings Below Average 20.69% 5 6 Management Sensitivity to Market Risk Average 41.38%
Percentage of banks currently utilizing interest rate swaps to lengthen the duration of funding during the rising rate environment Percentage of banks currently employing match-funding strategies Not Using 65.52% Using 34.48% Using 51.71% Not Using 48.28% Want more insight about the rising rate environment? LEARN MORE
Conclusions Final takeaways and next steps regarding wholesale funding.
As of Q3, 43% of all U.S. banks employ brokered deposits, representing only 5.43% of total bank assets and 7.09% of total deposits. Total balances of $936B reflect a continued upward trend. $1,000,000 Total Brokered Deposits U.S. Banking System 1984-Q3 2017 ($ millions) $936 Billion Brokered deposit balances remain near historically high levels and demonstrated strong availability and stability throughout the 2007-2010 recession $800,000 $600,000 Q1 2016 decrease due to one institution s reclassification of ~$122B of affiliated sweeps to non-brokered status $400,000 $200,000 0 1984Q3 1985Q2 1986Q1 1986Q4 1987Q3 1988Q2 1989Q1 1989Q4 1990Q3 1991Q2 1992Q1 1992Q4 1993Q3 1994Q2 1995Q1 1995Q4 1996Q3 1997Q2 1998Q1 1998Q4 1999Q3 2000Q2 2001Q1 2001Q4 2002Q3 2003Q2 2004Q1 2004Q4 2005Q3 2006Q2 2007Q1 2007Q4 2008Q3 2009Q2 2010Q1 2010Q4 2011Q3 2012Q2 2013Q1 2013Q4 2014Q3 2015Q2 2016Q1 2016Q4 2017Q3
Compliant Wholesale Funding Options for Banks As noted above in both the Highlights and Results sections, maintaining regulatory compliance is a top concern driving banks to both use and avoid brokered deposits. Regulators have viewed wholesale deposits with wariness in the past, but now as consumer trends adjust and banks can no longer rely exclusively on branch representation and consumer traffic, brokered deposits can help banks build a quality deposit portfolio. Banks can attract wholesale deposits by leveraging certain services. Insured Deposit Programs for Deposit Institutions LEARN MORE An Insured Deposit Program (IDP) provides banks with a stable and predictable base of a deposits at a predetermined level and at an indexed cost from sources seeking to provide extended FDIC insurance coverage for their clients. Programs like IDP integrate seamlessly so you don t need to change your operations or deal with complex account management.
Stable Funding in a Rising Rate Environment At TBS we are highly sensitive to the way our IDP is deployed and applied, ensuring through our Bank Monitor risk assessment platform that only banks of the highest credit quality are selected. All AML, KYC, Patriot Act and OFAC documentation is provided to bank participants from the source institutions along with a comprehensive vendor risk profile with SOC1 audit report. Leveraging wholesale funding can help banks strike a balance with their deposit portfolio among the current rising rate environment and maximize the return to investors. In 2018, it is a strategy that more banks should absolutely consider for a stable, sizable and cost-effective source of deposit funding.