Are bank leaders adequately communicating the value of depositors and deposits today? No. The conversation that occurred within banks during the pandemic was that they would stop looking for deposits and that it would be fine if some left. If things have changed, unfortunately, sometimes an executive team will soften or even revise a posture without [adequately communicating] the change, and the front line continues to operate under the old marching orders. So the top of the house needs to ask itself if it has communicated those changes to the front line. You regularly post on LinkedIn. Recently, you wrote about multiple deposit pricing betas simultaneously. What did you mean? Technically, the deposit beta is a single ratio of the percentage change in total interest expense relative to the change in wholesale interest rates. So there’s not really a multiple beta; I’m sort of distorting the concept, but it gets bankers’ attention. To optimize results, management teams need to recognize different rate sensitivities for different products and deposit bases. For example, the amount of rate adjustment needed on a common savings product is very different than on a high-yield money market account that’s been promoted as high-yield. The fastest growing segment of deposits from 2018 and 2019 were actually time deposits, which many consider a relic of the past. Bankers knew they didn’t want to reprice their whole portfolio of non maturing deposits, and depositors saw a high enough interest rate to open an account. That combination caused CDs to grow at a 20% annualized rate, and we’ll see that again. What happens to deposits if the Fed continues to aggressively raise rates? It’s going to be an ongoing evolution or adjustment. Prior to the Great Recession, we would talk about Fed policy being accommodative or restrictive. The notion of a stimulative policy was outside the boundaries of sound economics. Ultra-low Fed Funds and quantitative easing have brought trillions in fixed income securities onto the government’s books. And we went too far. We used performance-enhancing drugs until we overdosed, resulting in a disease called inflation. But you know, for every interest rate, there’s a payer and a receiver. The receiver thinks one thing, and the payer thinks something else. So the idea that low-interest rates are always good for everyone I don’t think holds true. What are you recommending that bankers do now? Bankers should be continuously assessing their capacity for capital as well as their investment options. Wholesale needs to be part of the mix, not just on the funding side but also on the investing side. Not having a big bond portfolio doesn’t make sense when bonds are as profitable as loans. Also, the one-price-fits-all notion [of retail banks] shouldn’t be the thinking anymore, especially with the technologies we have today that can enable us to customize pricing for depositors. What’s the most common mistake bankers are making? Pursuing low-cost funds no matter what. It feels good not paying for deposits; it also feels good to think about the yield potential of our assets. But at some level, more money is made with a smaller spread and higher volume. Is there something I should have asked but didn’t? Maybe, what do I think will surprise bankers in the next few years? I think they will experience a refinance wave on the deposit side. If they haven’t fortified their early withdrawal penalties, banks that hold time deposits today might be surprised when other financial institutions — some traditional, some nontraditional — come after those. Continued from page 21 Not having a big bond portfolio doesn’t make sense when bonds are as profitable as loans. Also, the one-price-fits-all notion [of retail banks] shouldn’t be the thinking anymore, especially with the technologies we have today that can enable us to customize pricing for depositors. www.coloradobankers.org 22
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