Issue 3 • 2022 15 HOW BANKS CAN RESPOND TO THE SHIFTING FUNDING LANDSCAPE By Rob Blackwell, Chief Content Officer, IntraFi With banks still flooded with cash in the wake of the pandemic, many are waiting to raise deposit rates, content to watch some excess liquidity run off the balance sheet. But in a rising rate environment, some analysts are raising questions about whether banks risk waiting too long. Indeed, over the next 12 months, 77% percent of bank executives expect deposit competition to increase, and 90% anticipate higher funding costs, according to IntraFi’s most recent quarterly survey. To better understand how banks should be thinking about funding, we recently sat down with Neil Stanley, founder and CEO of The CorePoint, for Banking with Interest. Neil shared his thoughts on the Federal Reserve interest rate outlook, how soon banks should be responding, alternative investments to consider, and much more. What follows is our conversation, edited for length and clarity. (This article was updated on July 19, 2022.) How should bankers be responding to the Fed? Should they be raising rates? Yes, but not across the board. To ignore that rates are rising in the wholesale markets would be a mistake; in the non-loan market, banks can get good rates at a very short duration. Why would they not pay something closer to those rates in this environment, knowing that the Fed is going to be aggressive? It’s hard to understand that banks can simply opt out when the wholesale world gives them riskless profit opportunities. Some banks gained so many deposits during the pandemic that they actually want a certain amount off their books. Are they right? A bank may have a low loan-to-deposit ratio relative to its history, but it can make money by deploying assets today – that’s the part that’s hard for some to see. Digital banks and neobanks, competitive threats that didn’t exist 15 years ago, are more than happy to relieve banks of the burden of paying something materially less than Fed Funds for insured deposits. So, I think the question [for banks] is, do I have enough capital? If so, I’ll take these assets. But I have to figure out how to negotiate with depositors without paying everybody higher rates. Are bank leaders adequately communicating the value of depositors and deposits today? No. The conversation 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 Continued on page 16
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