WWith the Fed cutting rates by a full percentage point since September, bankers are rethinking their strategies for funding and liquidity management. Declining interest rates may tighten the spread between earning assets and liabilities, requiring bankers to adjust to the changing environment. Here are three strategies bankers can leverage now to walk this tightrope: 1. Examine and Reprice Short-Term Liabilities: Falling rates will impact profitability. To counterbalance, banks will need to reprice a portion of their liabilities, reducing interest paid to some depositors. While some customer runoff will be inevitable, bankers should prudently consider their approach, as cutting rates too swiftly (or for too many customers) could lead to unexpectedly large losses in funding. Thoughtfully considering which classes of customers will see the first-rate cuts (preserving higher rates for higher-value depositors), in conjunction with using short-term funding solutions, can help banks maintain desired funding and optimal liquidity levels. 2. Assess Whether to Repay Long-Term, Fixed-Rate Liabilities: Banks will also need to check their longer-term liabilities and decide if they are worth holding or paying off early and replacing them with shorter-term, lower-cost deposits. Fortunately, the math behind this decision is easy — bankers will just need to compare the prepayment penalty against the cost of continuing to pay above-market rates. Top Strategies for Managing Liquidity in a Falling-Rate Environment By H.D. Barkett, Senior Managing Director, Treasury Desk, IntraFi Colorado Banker 16
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