deposits-7-18-18.pngIf you look at financial news headlines or results from Promontory Interfinancial Network’s latest Banking Executive Business Outlook Survey, it has become clear that the competition for deposits is reaching highly competitive levels, forcing banks of all sizes to consider new strategies that position them favorably as interest rates continue to rise and the regulatory environment transitions.

Some say this environment could bring about a war-like scenario. Deposits were plentiful during the decade following the financial crisis, when customers shifted to cash positions. That trend is beginning to reverse itself, but in a slightly different way, as more deposits begin to leave institutions that long held them. As the No. 1 provider of Federal Deposit Insurance Corp.-insured deposit sweep services and a partner to thousands of banks across the country, we hear this from banks all the time.

Some advice on strategy development was shared during a recent webinar hosted by Promontory Network and Bank Director. The webinar featured insights from representatives of Farin and Associates, Sandler O’Neill + Partners and Darling Consulting Group.

Key points that came from the webinar included:

  • Don’t fixate too much on interest rates. Instead, dive deeply into your current deposit base and study it to develop more meaningful long-term strategies. Rates are important, but they should be a guide for goals, not the only factor.
  • Deliver products that your customers want. Many banks offer money market accounts which customers want, but sometimes, the pricing has not been reconciled with the current market, and that can make a difference. Also, if your bank’s deposit products are not going to satisfy its asset and liability management goals, consider developing more attractive products.
  • Think long term. It’s easy to be consumed by the short-term growth or retention of deposits or overall cost of funds, but a long game should be played as well for the stability and longevity of the institution. Considering how short-term objectives play into long-term goals and successful strategies can make a big difference.

Since the webinar was held, a new opportunity to help banks compete for retail deposits has emerged from one of the lesser-known provisions put in place through the Economic Growth, Regulatory Relief, and Consumer Protection Act. And it can help banks that utilize reciprocal deposits immediately. Specifically, the act changed the classification of most reciprocal deposits so that they are no longer considered brokered.

Reciprocal deposits are deposits that a bank receives through a deposit placement network in return for placing a matching amount of deposits at other network banks. Placing funds using a deposit placement network enables a bank to accept and help make eligible for FDIC insurance deposits beyond the standard $250,000 by dividing and distributing the deposits to other banks in the network, while at the same time receiving an equal amount of deposits from other network banks that are doing the same thing with their customer funds. Banks that use reciprocal deposits can enable a large, local depositor to access multi-million-dollar FDIC protection while developing more local relationships than they otherwise might and using the underlying deposits to fund more loans.

Banks can take advantage of the new treatment of reciprocal deposits by:

  • Seeking more large-dollar, locally-based customers that they may have been hesitant to approach before
  • Attracting more large-dollar deposits from locally-based businesses and other types of customers that may be keeping their deposits with larger banks that they perceive as “too big to fail”
  • Replacing higher amounts of more expensive collateralized deposits
  • Replacing higher amounts of more expensive, less stable listing service deposits
  • Replacing higher amounts of wholesale funding
  • Pursuing more government and financial institution deposits as the nation’s largest banks—which are subject to liquidity coverage ratio calculations—look to shed these deposits, providing an opening for community banks to win these deposits and to go after the whole banking relationship
  • Locking in more low-cost funding now as a hedge against higher rates in the future, recognizing that large deposits from institutional investors are good targets for banks looking to take advantage of the low deposit betas associated with reciprocal deposits and to secure customers for longer terms

The bottom line is that the battle for deposits is intensifying, making now the time to discuss what success looks like and to determine the best strategy to get there.

To learn more about the reciprocal deposits provision enacted in the regulatory relief package signed in May, visit


Steve Kinner