Pub. 11 2021-2022 Issue 1

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S — H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S May • June 2021 9 economic hardship, people have a way of remembering who was in their corner. It is also important to remember that, in an average year, bank leaders would have to spend marketing dollars to attract these same individuals and businesses to their institutions. The fact that new customers are already customers (not prospects) represents an opportunity in and of itself. However, if banks do not act now to cultivate loyal relationships, they risk losing their new customers when the economy turns. 2. Derivatives deserve a closer look Many bank leaders are reluctant to embrace swaps. Some think them too complex, others don’t want to deal with the associated regulatory burdens, and others are concerned about exposure to credit risk or risks unseen. At the same time, more bankers are using them and finding them beneficial. Swaps offer pricing flexibility and can free up capacity for fixed-rate lending. They enable banks to hedge against rising rates and give customers what they want. For instance, while banks may prefer variable-rate positions, particularly in a low-rate environment, customers tend to demand long-term, fixed-rate loans. With an interest-rate swap, both outcomes are effectively possible. Now is a good time for bank leaders to reevaluate the use of swaps at their institutions. By modeling different scenarios with swaps on their balance sheets, they can start to understand when it makes sense to use them. If they aren’t using swaps, they should explain why and the conditions under which they would. 3. Review sources of wholesale funding In a healthy economy, loans outgrow deposits – the question is when and by how much. If banks suddenly find themselves in a situation where money is going out the door, they may need to replace deposits with funds that offer a spread. Many will not want to exit certain asset positions. Of course, wholesale funding is also an excellent tool for managing interest-rate risk – much more so than retail deposits. Given that we are in a once-in-a-century funding environment, now is the time for bank leaders to take a harder look at their sources of funds and funding strategies. They could find ample opportunities to lock in low rates, refinance higher-cost funding and diversify their funding sources. Now is the time to prepare. The current environment poses many challenges. However, with COVID-19 vaccinations growing throughout the population and new case numbers falling by the day, bank leaders should be taking steps to prepare for a potential rebound. They should be mindful that often the most significant risk to an institution is the risk of doing nothing. This axiom holds particularly during times of economic uncertainty, which can cause business disruptions and also have a paralyzing effect on decision-making. About IntraFi Network IntraFi Network is the number one provider of deposit products to U.S. financial institutions, a leading provider of overnight and term funding solutions and one of the nation’s best places to work. The company’s network of nearly 3,000 banks – the largest of its kind – brings scale, stability, and the confidence of working with a category leader. Its members include most of the nation’s community banks, minority depository institutions, and community development financial institutions. n