deposit-4-17-18.pngDuring the last decade, deposit gathering was not a priority for many banks. Liquidity was plentiful, and loan growth was the primary focus. However, over the last year we have seen a shift, as increased loan demand has absorbed excess liquidity, the Federal Reserve has begun to unwind its quantitative easing policy and the nation’s largest banks have shifted their deposit-gathering priorities, all leading to a more competitive deposit market. Should these trends continue, having a well-defined deposit growth strategy will be paramount, particularly if interest rates rise as expected.

Industry experts predict that the Fed’s reversal of its policy of quantitative easing could ultimately drain about $1.5 trillion in deposits from the market, and that loan demand could outstrip deposit growth by $200-$300 billion per year. In Promontory Interfinancial Network’s Q4 2017 Bank Executive Business Outlook Survey, 64 percent of respondents indicated that they expect to see an increase in loan demand over the next twelve months. Furthermore, the introduction of the liquidity coverage ratio (LCR), which applies to banks over $50 billion in total assets, has elevated retail deposits to a preferred status over government entity and other nonretail deposits. This is because banks subject to the LCR rule must generally hold more high-quality liquid assets against nonretail deposits, making them more expensive.

It appears a combination of factors—the reversal of quantitative easing, the expectation of increased loan demand and the recent LCR rule—has prompted the largest banks to invest in excess of $1 billion in technology and marketing to attract deposits and get ahead of the projected liquidity shortfall (based in part on information from S&P Global Intelligence, including material distributed under license from SNL). The largest banks have raised the level of competition for retail deposits by aggressively targeting retail customers to replace other segments.

We believe this creates an opportunity for regional and community banks in the government-entity space. Prior to the LCR implementation, banks over $50 billion in assets held more than half of the city, county and school district funds across the country. As of September 2017, banks under $50 billion now hold the majority. If your bank has not contemplated government-entity deposits or only has nominal balances, perhaps it is time to reconsider this customer class.

The cash management needs of government entities span across demand deposits, savings accounts and CDs (certificates of deposit). While government entities can be rate sensitive, their deposits can be more efficient compared to wholesale funding, especially when average wholesale funding rates are taken into consideration. Additionally, banks can use reciprocal deposits, which offer access to multi-million dollar Federal Deposit Insurance Corp. (FDIC) insurance, to avoid ongoing pledging requirements for these customers, thus improving liquidity ratios. By shifting out of collateralized deposits into a reciprocal deposit solution such as Insured Cash Sweep® or CDARS®—arguably the largest and most well-known FDIC-insured deposit solutions—banks can free up more funds that can be used for growing loans. This strategy has the potential to expand net interest margins and improve profitability.

Another deposit strategy to consider is targeting corporate treasurers and nonprofit financial managers that have traditionally chosen money market mutual funds (MMMFs) for their cash management needs. Securities and Exchange Commission rules that went into effect in October 2016 have instituted a daily net asset valuation on these funds, resulting in the migration of more than $1 trillion from institutional MMMFs into a combination of government funds and bank money market accounts. Your bank may find fresh opportunities to build relationships by leveraging reciprocal deposits as a safe, smart alternative.

Finally, when rates are higher, customers have historically shifted out of non-interest-bearing deposits and sought higher returns by substantially increasing balances in sweep vehicles, and by making CDs a much larger component of the deposit mix. Right now, it seems few banks are taking action to increase CD balances. Getting ahead of the curve and pursuing CDs not only makes sense from an interest rate risk perspective, but also has the potential to stabilize a bank’s deposit base by reducing volatility.

The deposit market is changing, competition is growing and rates are on the rise—is your bank ready? One of the best ways to prepare is to make sure your bank has a written deposit strategy. Visit to see the five questions experts say each plan should address.

Lance Caldwell

Joseph Hooker