Bank Liquidity andBank Liquidity andWholesale Funding Part IWholesale Funding Part I
Bank Liquidity andBank Liquidity andWholesale Funding Part IWholesale Funding Part I
Bank Funding and Bank Funding and Liquidity TrendsLiquidity Trends
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In this section, we will look at:
Definition of liquidity FHLB advances and community banks Deposits versus mutual funds Funding changes What’s next?
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Liquidity - Definition Prior to 2001
“The ability to efficiently and economically accommodate decreases in deposits and other liabilities, as well as fund new assets.”
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Liquidity – Current Definition
“The ability to fund assets and meet obligations as they become due.”
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Liquidity – Definition in Action
Ability to manage assets and liabilities to meet obligations that are:– Foreseen– Unforeseen
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Liquidity – The Complete Picture
Tendency to focus on funding capabilities Primarily resident as assets on balance
sheet
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Cash-Producing Assets
Assets maturing within one year Readily saleable short term assets Longer term assets Loan participations
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Where Does Liquidity Reside?
Does not solely reside in a bank’s ability to:– Borrow funds in the marketplace– Generate deposits
Many banks produce additional liquidity from sources other than: – Core deposits– Existing balance sheet
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Sense of Loyalty?
There is a sense of loyalty for customers with:– Passbook savings accounts– CD’s under $100,000
There is no sense of loyalty with alternative sources of funding.
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In this section, we will look at:
Definition of liquidity FHLB advances and community banks Deposits versus mutual funds Funding changes What’s next?
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History of FHLB Advances
Significant source of funding for thrifts for many years
Until 1999, FHLB membership was required for:– Federally chartered savings banks– OTS regulated savings banks
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History of FHLB Advances (Continued)
Thrift FHLB membership stable over past 10 years
Currently, FHLB membership is voluntary for all financial institutions.
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History of FHLB Advances (Continued)
Commercial banks gained access to FHLB in 1989.– Strong growth in membership and borrowing
levels has occurred.– FHLB membership and advance usage more
than doubled over the past 10 years.
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In this section, we will look at:
Definition of liquidityFHLB advances and community banks Deposits versus mutual funds Funding changes What’s next?
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Deposits vs. Mutual Funds
Deposits have lost ground since the 1990’s From 1995 to 2003:
– Deposits as a percent of household financial assets decreased from 42% to 21%
– Mutual funds as a percent of household financial assets increased from 19% to 34%
– Overall, mutual fund assets increased from $2.8 to $7.4 trillion (164%).
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In this section, we will look at:
Definition of liquidityFHLB advances and community banksDeposits versus mutual funds Funding changes What’s next?
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Funding Trends in Community Banks
Core deposits Non-core deposits Borrowings
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Core vs. Non-Core Funding
Four points in time: 12/31/99 12/31/01 9/30/02 9/30/04
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Changing Economy
Time periods demonstrate depositor behavior during:– Economic prosperity– Recession– Recovery
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Core vs. Non-core Funding
Billions Source:Call Report Data
12/31/1999 12/31/2001% of total funding Δ
9/30/2002 9/30/2004% of total funding Δ
DDAs $68,857 $72,477 7.08% $73,246 $79,988 14.11%NOW Accounts $57,269 $61,301 7.89% $60,574 $65,899 11.20%Savings Accounts $63,494 $68,560 9.91% $77,711 $93,095 32.20%MMDAs $75,202 $90,270 29.49% $98,838 $110,309 24.00%CDs < $100M $184,608 $187,453 5.57% $184,400 $167,775 -34.79%Total Core Funding $449,430 $480,061 59.94% $494,742 $517,066 46.72%
12/31/1999 12/31/2001% of total funding Δ
9/30/2002 9/30/2004% of total funding Δ
CDs $100M or More $70,790 $82,739 23.38% $85,212 $88,159 6.17%Brokered Depos its $6,314 $8,937 5.13% $12,773 $19,215 13.48%Foreign Depos its $898 $1,066 0.34% $1,408 $850 -1.17%FHLB Advances $31,565 $33,302 2.40% $37,076 $44,600 15.75%Other Borrowings $32,021 $36,013 7.81% $52,091 $61,198 19.05%Total Non-Core Funding $141,588 $162,057 40.06% $188,560 $214,022 53.28%
Total Funding $591,018 $642,118 100.00% $683,302 $731,088 100.00%
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Core vs. Non-core Funding
Billions Source:Call Report Data
12/31/1999 12/31/2001% of total funding Δ
9/30/2002 9/30/2004% of total funding Δ
DDAs $68,857 $72,477 7.08% $73,246 $79,988 14.11%NOW Accounts $57,269 $61,301 7.89% $60,574 $65,899 11.20%Savings Accounts $63,494 $68,560 9.91% $77,711 $93,095 32.20%MMDAs $75,202 $90,270 29.49% $98,838 $110,309 24.00%CDs < $100M $184,608 $187,453 5.57% $184,400 $167,775 -34.79%Total Core Funding $449,430 $480,061 59.94% $494,742 $517,066 46.72%
12/31/1999 12/31/2001% of total funding Δ
9/30/2002 9/30/2004% of total funding Δ
CDs $100M or More $70,790 $82,739 23.38% $85,212 $88,159 6.17%Brokered Depos its $6,314 $8,937 5.13% $12,773 $19,215 13.48%Foreign Depos its $898 $1,066 0.34% $1,408 $850 -1.17%FHLB Advances $31,565 $33,302 2.40% $37,076 $44,600 15.75%Other Borrowings $32,021 $36,013 7.81% $52,091 $61,198 19.05%Total Non-Core Funding $141,588 $162,057 40.06% $188,560 $214,022 53.28%
Total Funding $591,018 $642,118 100.00% $683,302 $731,088 100.00%
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Brokered Deposits ($100M +)
Date Total
12/31/99 $3,253MM
12/31/01 $5,409MM
9/30/02 $8,030MM
9/30/04 $12,198MM
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Other Borrowings
Date Total
12/31/99 $32,021MM
12/31/01 $36,013MM
9/30/02 $52,091MM
9/30/04 $81,198MM
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In this section, we will look at:
Definition of liquidityFHLB advances and community banksDeposits versus mutual fundsFunding changes What’s next?
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Changes in Rates
Between 9/30/04 and 3/31/05 The Federal Reserve increased rates.
1.75%
2.75%
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Short-term Rates
Increased in March 2005 Stock Market appeared to stumble Downward pressure on NIM as funding
costs rose
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Banks’ Dilemma:Sources and Uses of FundingFDIC-Supervised Community Banks
(Billions) Source: Call Report Data
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Banks’ Response
Innovatively priced time deposit products Borrowings FHLB advances Repurchase agreements
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An Interesting Trend
Community banks favor keeping securities portfolios available for sale
Trend indicates community banks frequently use securities portfolio as source of liquidity
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Balancing Act
Contributing factors to continued and increasing reliance on non-core funding sources:– Strong asset growth– Stagnant core deposit growth
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Possible Reasons for Shift
Changes in the Fed Funds rate Rebound in the economy Consumer concerns about the job market Refinancing boom
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Changes in the Fed Funds Rate
Influence returns on bank deposit products: Certificates of deposit Savings accounts Money market accounts
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Historical Fed Funds Rates
Date New Rate05/16/2000 6.50%
12/11/2001 1.75%
11/06/2002 1.25%
06/25/2003 1.00%
06/30/2004 1.25%
09/21/2004 1.75%
11/10/2004 2.00%
02/01/2005 2.50%
03/21/2005 2.75%
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Rebound in the Economy
Investor confidence returns Sophisticated investors more likely to:
– Place funds in liquid, non-maturity deposit accounts
– Move them to higher yielding mutual funds and/or stocks
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Concerns about Job Market
Consumers worried about: Future income Labor markets Business conditions
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Refinancing Boom
Significant amount of escrow deposit funds Overall elevation of core deposits Non-maturity deposits realize gains from
short term funds
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Bank Liquidity and Wholesale Funding Part I
Select the next section, Federal Home Loan Bank Advance Trends, to continue.
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