utah.bank 20 What are you seeing right now vis-a-vis banks and bank balance sheets? The majority of banks aren’t overly concerned about losing relationships. They’re facing deposit pressures in a few areas, but the funds they’ve lost have been mostly discretionary. However, things are about to get interesting. That sounds ominous. What do you mean? During the last rising-rate environment, the Fed took nearly two years to increase rates by 200-225 basis points, and deposit-rate changes were nearly three times as responsive to the second hundred basis points as they were to the first. Similarly, during the period leading up to the Great Recession, we had a 425-basispoint move. Things were pretty tame during the first 200 basis points, but by the third and fourth hundred, the proverbial gloves came off. Rates have now risen uncharacteristically aggressively in a short period of time – in fact, the delta between market rates and what banks are paying has never gotten this wide this fast. Even if depositors aren’t looking to move their money, it’s hard for them to ignore what’s happening. Additionally, during the pandemic, we made it easier to do things electronically and conditioned customers to avoid branches. Today, banking practices are very different than they were three or four years ago. So the dynamics are about to get really interesting, notwithstanding the excess liquidity still out there. What’s your advice to banks? Have a clearly documented game plan. (Many banks don’t.) Start by figuring out how much money you can, or are willing to, let leave; then determine which deposits are most valuable and prioritize those. Next, divide your deposit base into manageable pieces. Start by rank-ordering your largest-balance relationships; this will help with one-off conversations. Second, review your mass-market, traditional banking relationships. Third, review the “tweeners,” or those that aren’t quite whales but larger discretionary balances that could be at risk (mid-tier balances comingled with operating balances in those traditional accounts). Get your people in a room to assess the elasticity of deposits in each sector and your value proposition for those different consumer types, specifically, whether it’s driven by rate or other factors. Figure out your pricing strategy for each and how much outflow you’re willing to accept in each area and why. You recently wrote that all banks have what appear to be core deposits but are actually Trojan Horses. What did you mean? Monies that look like core deposits but have a high potential for disintermediation. Municipal deposits are one kind of Trojan Horse. Large commercial balances are another – many businesses have funds sitting in their banks that dwarf what they need for operations, but they’re also facing cost pressures, and it’s hard to ignore the opportunity to pick up notably incremental yield on BANKS NEED A GAME PLAN FOR TODAY’S INTEREST RATE ENVIRONMENT By Rob Blackwell, Chief Content Officer, IntraFi As the Federal Reserve aggressively hikes interest rates to tamp down inf lation, depositors are starting to demand more for their money. Results from IntraFi’s most recent quarterly survey of bank executives indicate the trend is likely to continue. Ninety-five percent of respondents expect funding costs to go up, and 71% said deposit competition will increase. But this doesn’t mean banks have to let macroeconomic forces or competitors dictate their strategies. Matt Pieniazek, president and CEO of Darling Consulting Group, recently joined me on the Banking with Interest podcast to discuss how banks should think about their balance sheets in the current interest-rate environment. He explains why all institutions need clearly documented game plans, how to extricate rate from the value proposition, why rising rates are a good thing, and much more. What follows is our conversation, edited for length and clarity:
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