Liquidity Funding Alternatives
The word of the day is “Liquidity.” The definition of liquidity as examiners would see it is the ability of an institution to accommodate expected and unexpected withdrawals in deposits and other liabilities and to fund increases in assets at a reasonable cost. Over the past few years, banks have been flush with on-balance sheet liquidity in the form of cash, securities, and core deposits. However, loan demand has been increasing and we are starting to see liquidity tightening and the loan-to-deposit ratio increasing. This tightening is causing banks to look and depend on funding alternatives outside of core deposits, since core deposits aren’t growing as fast as the loan demand. So, when you are searching for additional liquidity, which option(s) are best for your situation? As long as the bank maintains appropriate capital levels, the following options are available to you.
Fed Funds Purchased
· Used for short-term funding needs – generally overnight.
· Readily available at a reasonable cost.
· Can be expensive in a volatile market when funding needs are more long term.
· Adds to the Net Non-Core Funding Dependence ratio, also known as the Dependency Ratio, for regulatory purposes.
Internet and Listing Service Deposits
· Generally, counted as core deposits for the Dependency ratio calculation.
· Can be accessible even when capital is under pressure.
· Customers can opt out and take the penalty if rates change enough to prompt the move.
· Using internet deposits may not increase the funds available, but could increase the cost of the core funds.
· Listing service deposits can have limited audience due to being a paid subscription service. Only those that subscribe can get or provide funds.
· With listing service deposits, may not be able to get all the funding needed or wanted at a certain duration and need to be at the higher end of rate scale to get noticed.
Term Borrowings
· Can get funding out to 30 years.
· Can have fixed or floating rate advances.
· Can be accessible when capital is under pressure. (May have to deliver collateral)
· Generally required to purchase stock to be able to borrow. Dividends from the stock purchase can help to reduce the overall borrowing cost.
· Will generally need to post collateral to be able to borrow.
· Borrowing costs can be significant.
· Adds to the calculation for the Dependency Ratio for regulatory purposes.
· Many times has a pre-payment penalty if you want to get out of the position.
Bank-Issued Brokered CDs or DTC Brokered Deposits
· Can get funding out to 30 years.
· No collateral posting requirements.
· Issued CDs are protected from prepayment from market rate changes as they don’t have a provision for early withdrawal.
· Can be issued as callable by the issuer, giving more control over exiting the position.
· Open to a broader audience as there is not a subscription required. Any depositor that has a brokerage account has access to a brokered deposit.
· Will not interfere with your local footprint deposit pricing. This is an additive funding source and doesn’t cannibalize a local funding program. Banks can black-out certain markets, if desired.
· Provides additional liquidity sources by keeping your borrowing lines available.
· May be more cost effective than other long-term funding options.
· Adds to the calculation for the Dependency Ratio for regulatory purposes.
· Generally unavailable when capital is under pressure.
As you can see when going through the pros and cons of each of the above funding alternatives, banks have options when it comes to alternative liquidity funding. While cash on hand, a high quality securities portfolio, and core deposits are the preferred funding sources for bankers and regulators alike, knowing what is available when those options aren’t gives you, the banker, the ability to make the best decision when it comes to profitability.
Part of our service to our customers is to understand all of your needs. We have the tools and knowledge to understand your overall asset liability strategies. Through our asset liability management division, Asset Management Group, we provide our clients with detailed liquidity reports to track current liquidity and project future liquidity needs. We also consult with our clients on various liquidity strategies depending their needs. Our Capital Markets Group helps our clients with managing the securities portfolio to provide liquidity or yield depending on the situation. The Capital Markets Group can also assist with helping clients issue brokered deposits should that need or want make sense.
If you have questions or just want to learn more, reach out to your Country Club Bank representative, or you can call or email 800-226-1923 or amg@countryclubbank.com.