| -- End Ad Box ---> | | | | needs one-year money, an ad in the local paper or an |
| Recognizing the Importance of Deposit Management | | | | in-branch campaign may do the trick. However, the |
| to an Effective Risk Management Strategy | | | | bank may have to implement a more diverse |
| Bankers consistently identify deposit growth as a | | | | strategy to raise the deposits that are often needed |
| principle driver of their future success. At the same | | | | to match the longer assets on the balance sheet. A |
| time, experience shows that many banks still employ | | | | bank that limits its deposit gathering to local markets |
| a relatively antiquated approach to manage their | | | | may be exposing itself to potential mismatch. |
| deposit gathering efforts. They generally take a "if it | | | | It is also important to consider not just the rate, but |
| isn't broke, don't fix it" approach and continue with | | | | also the efficiency of access. Advertising a special |
| the same strategies that have served them well in | | | | rate on a CD or money market fund may raise the |
| the past. | | | | needed deposits, but the bank has very little control |
| Well, like it or not, the financial landscape has changed | | | | over the amount and timing of these deposits. In |
| dramatically. Now more than ever, banks must adopt | | | | addition, the cost of funds will also include not only |
| more proactive deposit management methods, | | | | the advertised interest rate, but also the advertising |
| acknowledging that it is vitally important to | | | | fees and the staff needed to field calls and |
| incorporate deposit structure risk into the institution's | | | | potentially process thousands of relatively small |
| long-term risk management strategies. The truth is | | | | deposit transactions. |
| that a bank cannot effectively manage its risks if it is | | | | Alternative funding sources such as wholesale |
| not evaluating all available options in its efforts to | | | | products, for example, provide low-cost, on-demand |
| properly manage and price its deposit-products. | | | | access to deposits with considerable operational |
| Virtually every bank has a designated risk | | | | efficiencies. Building, maintaining, staffing and |
| management officer who is charged with developing | | | | supporting brick and mortar branches carry significant |
| overall risk management policies and procedures and | | | | ongoing costs. Wholesale funding, on the other hand, |
| ensuring that they are consistently applied across | | | | operates on a "pay-as-you-go" basis. You can turn |
| branches and business lines. Many of these banks, | | | | the lines on and off according to your needs and you |
| however, lack the resources to focus directly on | | | | only pay for it when you need it. |
| coordinating the multiple aspects of deposit | | | | Risk and Deposit Management Are Intertwined |
| management. | | | | In today's volatile interest rate environment, |
| Banks should, therefore, consider appointing a | | | | mismatched assets and liabilities can represent a |
| "Deposit Strategy Officer," a person whose | | | | major risk. To manage this risk, banks need policies |
| responsibilities would include: diversifying funding | | | | and procedures that make the liability matching |
| sources; knowing the local market; educating | | | | structure more efficient. |
| management and directors; understanding the | | | | Current risk management policies take rigorous steps |
| environment and alternative funding sources outside | | | | to minimize default risk, but often do very little to |
| the local market; and actively fostering an | | | | protect against the cost-of-funds risk in a rising |
| appreciation of the liability side of the balance sheet | | | | interest rate environment. Just consider: Whenever |
| among those in charge of the asset side. | | | | the return on a loan portfolio is repricing, it is critical |
| There are several reasons why now is the time to | | | | that it align with the repricing on the liability side-i.e., |
| consider appointing a Deposit Strategy Officer. | | | | similar direction and similar frequency. The bottom line |
| The World is Smaller | | | | cost of so-called cheap deposits like interest-bearing |
| The days when community banks could rely on bricks | | | | checking accounts and money market deposits can |
| and mortar for adequate deposits are a thing of the | | | | increase dramatically if they are tied to indices that |
| past. Banking is no longer a local activity. The | | | | are overly sensitive in an unfavorable interest rate |
| proliferation of the internet and financial publications | | | | environment. Therefore, it would appear to be in a |
| has given both retail and institutional customers | | | | bank's best interests to balance those deposits with |
| access to banks around the country. Customers can | | | | a ladder of longer term deposits to protect against a |
| compare rates and maturities, get advice and | | | | rise in interest rates. |
| execute transactions from the comfort of their own | | | | This could, however, prove to be a challenge for |
| homes or offices any hour of the day or night. In | | | | banks that focus primarily on their local geographical |
| addition, competition has widened. Deregulation has | | | | areas and traditional customer base. The flight to |
| enabled financial services providers to offer | | | | quality triggered by the economic meltdown and the |
| competitive deposit products. As a result, a | | | | higher FDIC limit has resulted in a deposit spike for |
| community bank in Little Rock has to compete with | | | | most banks. While this is certainly good news, there |
| the mega-corporations as well as with banks in, for | | | | may be an inherent problem. This flight to quality is |
| example, Maine and California for the customer | | | | also, in most cases, a flight to liquidity. Most of these |
| whose home or business is down the block. | | | | deposits are going into savings accounts, money |
| To successfully compete in this expanded market, | | | | market funds or CDs of one-year or less. |
| every bank needs a comprehensive deposit growth | | | | In times like these when the public is thinking |
| strategy. This strategy should outline not only how | | | | short-term, the Deposit Strategy Officer would be |
| the institution is going to operate locally, but also how | | | | charged with going beyond local markets and finding |
| it can tap markets beyond its city limits when such | | | | alternative sources of longer-term funds. |
| action is warranted. | | | | The Case for Deposit Strategy Management |
| All Deposits Are Not the Same | | | | Banks continually talk about the importance of |
| When changes in asset composition necessitate | | | | deposit growth, but generally do not take the steps |
| changes in funding strategy, banks need to know | | | | necessary to address deposit-gathering in a |
| how and where to get funds most cost-effectively. | | | | systematic and consistent fashion. A strong deposit |
| Pricing and available maturities vary from market to | | | | strategy management will help the bank more |
| market. It is imperative that a point person within the | | | | efficiently generate cost savings that will translate |
| bank be continually informed as to the cost structure | | | | into increased profitability. |
| and availability of multiple lines of funding. If a bank | | | | |