The banking industry is experiencing change like it never has before. Digital delivery channels will have a profound effect on the typical bank’s business model, and further change is coming through regulatory relief. Both can offer new opportunities and new risks. KPMG’s David Reavy details what you need to know about these changes and how boards should focus on today’s risks.
A tight labor market could be big risk if your bank lacks the talent to fuel its future. How can bank boards and management teams manage this risk? In this video, Julia Johnson of Wipfli shares why your bank should conduct a human resources review and provides tips to help banks tackle the talent challenge.
Four HR Areas Bank Leaders Should Be Watching
How Boards Can Better Understand HR Portfolio Risk
Gender pay equity and board gender diversity are two areas of focus for both the media and investors. Lately, many large institutional investors have turned their attention to environmental, social and governance (ESG) issues, where board diversity has taken center stage and questions around gender pay equity are increasing. Boards and management should proactively gain an understanding of their current position and any concerns on these fronts to avoid adverse reactions from employees and/or shareholders.
Slow progress on gender diversity in the boardroom has led many large investors to push for an increase in the number of women on boards. Several influential institutional investors such as Blackrock, State Street Global Advisors and Vanguard have added diversity stipulations to their engagement and voting policies, citing studies that link increased female representation on boards with improved shareholder returns. More specifically, these institutions may vote against, and proxy advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis may recommend voting against, the nominating and governance committee members if there are not a least one or two women on the board. These voting policies have been very impactful, and we have seen a dramatic increase in women serving in board roles at the largest organizations.
Compensation Advisory Partners (CAP) researched the 15 largest public diversified financial services companies in the Fortune 100 and found that approximately 50 of companies had at least three women on their board and an additional 20 percent had at least two. As a comparison, CAP researched the board composition of 90 smaller financial services companies with assets between $5 billion and $20 billion and found approximately 15 have at least three females on their board and an additional 15 have at least two. Similar to other compensation and governance trends, we expect smaller financial organizations to catch up with the increased external pressure.
In addition, initiatives such as the NYC Comptroller’s Boardroom Accountability Project 2.0, focus on enhancing disclosure of board composition through a skills matrix. California is now the first state considering a bill to require a minimum number of women on all boards of the state’s more than 400 companies. These initiatives are driving heightened attention to the diversity and competencies of the board as a whole.
While information on director composition and profiles is public, this is not the case with gender pay equity across an organization. In the U.K. there is a requirement to disclose gender pay statistics for organizations with at least 250 employees, but that does not currently exist in the U.S. Even so, we have observed some institutional investors use shareholder proposals to pressure large organizations to provide public reports on gender pay.
Several financial institutions have been under scrutiny for a lack of female representation in senior roles despite a majority of their employees being female. Unlike the U.K., where all employees must be included in the sample, shareholder proposals in the U.S. focus on a comparison of “like-for-like jobs.” Over the last three years, companies recommended shareholders vote against the proposal, and support averaged around 15 percent. Only 5 proposals (compared to 14 in 2017) have gone to a vote in 2018, none at financial services companies (compared to 7 in 2017), since several large financial organizations such as Citigroup, Bank of America, JPMorgan Chase & Co., and Wells Fargo & Co. were able to have these requests withdrawn from their annual proxy statement and in exchange agreed to publish their gender pay. In all cases, the reports have shown almost no gap, but the approach by company can vary.
These two movements have put a spotlight on the underlying issue of equal representation in the boardroom and pay equality across organizations. The push for board equality has already resulted in progress especially at larger organizations. Boards are reviewing nominating and governance committee charters and adopting policies to promote diversity in the board recruitment process. On the gender pay equity front, even though disclosure is not required in the U.S., momentum and pressure are building from institutional investors for companies to disclose gender pay gaps.
We expect boards of all companies to start asking management if a gender pay gap exists, and what they should be doing to address any gaps that do exist. Conversations on both these topics should be an agenda item in all boardrooms today.
As rates continue to rise, now is the time for bank boards and management teams to consider deposit strategies for the future. In this video, Barbara Rehm of Promontory Interfinancial Network sits down with H.D. Barkett, senior managing director at Promontory Interfinancial Network, who shares his thoughts on what banks should consider in today’s environment.
Balance Sheet Advice for Today’s Banks
Impact of Regulatory Relief on Reciprocal Deposits
For more information about the reciprocal deposits provision in the Economic Growth, Regulatory Relief and Consumer Protection Act, please visit Promontory Interfinancial Network by clicking here.
A stagnant board is an ineffective one. While some directors can serve long tenures and continue to be actively engaged in the affairs of the bank, some directors grow less effective. What’s more, a board composed of directors who have served together for a number of years, or even decades, can grow complacent in their approach to bank strategy and oversight. This isn’t in the best interest of shareholders, employees or customers.
So how can boards fight complacency? Bring on some new blood. “That’s the attraction of bringing a young person in,” says Ben Wynd, a 40-year-old director at Franklin Financial Network, a $4.1 billion asset bank holding company headquartered in Franklin, Tennessee. He joined the board in 2015 and is an accountant with public company reporting expertise. “I have a desire to grow my practice. I have a desire to grow and become successful individually. I have energy, and I ask a lot of questions.”
It is rare for a bank to bring on a director aged 40 or younger as Franklin Financial has done. The 2018 Compensation Survey, conducted in March and April, finds that a whopping 84 percent report their board lacks any directors in this age group.
But boards like that of Franklin Financial, as well as $1.8 billion asset ESSA Bancorp in Stroudsburg, Pennsylvania, and $2.4 billion asset Sierra Bancorp in Porterville, California, are finding a way to attract young professionals to their board. Here’s how.
Actively seek prospective younger directors. Your board can’t count on a skilled, young professional just falling out of the sky, so at least one director on the board should be advocating for the addition of younger perspectives and identifying potential board members. The more directors serving as advocates, the better.
Wynd says Paul Pratt Jr., a director who served on the Franklin Financial board since its 2007 founding, was just that sort of advocate. (Pratt’s term expired in 2018, but he continues to serve on the bank board.) “Any time I see a great talented young person, I try to engage them” and understand their goals, Pratt says. “There’s a lot of supreme young talent out there that needs to be on bank boards helping make critical decisions on how the bank grows.”
Board members can also leverage friends and family to identify prospective board members.
“A member of the board lived in my community and is friendly with my parents,” says Christine Gordon, 42, a director at ESSA since 2016, who has a background as a lawyer and experience as the deputy chief compliance officer at Olympus Corp. of the Americas, as well as deep connections in the community. “He approached me and asked whether I’d be interested in joining the board and talked to me a bit about what it would entail.”
Similarly, Vonn Christenson, a 38-year-old attorney who was appointed to Sierra Bancorp’s board in 2016, says he was approached by a Sierra director who was his parents’ friend and neighbor. “The bank had been expanding, had been acquiring other banks and was looking to expand more. Their board members were aging, so they were looking to add some members.”
Communicate the benefits of serving on a bank board. Prospective younger directors with the skill sets that bank boards need are in demand, and not just within the banking industry. “In all honesty, I probably have more opportunities [to serve on boards] than I have time and than my wife is willing to allow me to, so I’ve had to be selective in what I am involved in,” says Christenson. Make sure that the busy young professionals you seek as board members understand the benefits of serving on the board, as well as the bank’s growth trajectory.
And as much as long-term bank directors say that serving on a board is not about the money—just 14 percent of survey respondents indicate that offering a competitive director compensation package is a top challenge relative to their board’s composition—it could be the factor that leads an in-demand professional to pick your board over another.
Christenson says he had the opportunity to serve on the board of a local hospital but turned it down in favor of the bank. The bank “is a local success story in many ways, so there’s some more prestige that goes with it,” he says. Christenson also knew more members of the bank’s board, and “there’s compensation on the bank board, whereas it was voluntary on the hospital board.”
Ease the time burden. Juggling the professional demands of younger directors may necessitate rethinking how the board approaches meetings. Gordon has found web conferencing to be effective in allowing her to participate in ESSA’s board meetings when she’s traveling for work. And using technology like a board portal can help streamline board materials, making them easier to digest. “They’ve got a real nice platform to produce materials and keep them organized for future reference,” says Gordon. The board provided tablets to directors, so they can easily access the board portal.
Invest in creating a successful board. New directors, particularly younger ones, won’t be up to speed about the issues facing the banking industry, or even the fundamentals. “Educating new board members is very important. You join a bank board where folks have been there for years and years,” says Gordon. “I’ve been a board director for a couple of years, and I’m still learning.”
New directors should also meet with key members of the executive team, as well as one-on-one with board members. At ESSA, the management team teaches new directors about the bank and its primary areas of focus, says Gordon. The board also brings in speakers about specific topics, which can be vital to director education for old and new board members.
Investing in external training can be beneficial as well. But also expect to field a lot of questions from engaged new directors. And remember, those questions can benefit the board as a whole by leading if they lead to an examination of the bank’s practices and strategy. That’s the benefit of a fresh perspective, after all.
Ensure there’s a process to make room for new board members. Age diversity goes both ways—the board benefits from the views of young professionals as well as older, established directors who better understand the banking industry and have a historic perspective of their markets.
Establishing a mandatory retirement age can help cycle ineffective directors off the board, but some banks are uncomfortable with the possibility of losing engaged older directors. Providing exceptions for particularly skilled and effective board members, coupled with a mandatory retirement age, can be effective, as can term limits for banks uncomfortable with designating an age cap.
Conducting a board evaluation with individual director assessments and using a board matrix to identify knowledge gaps can be useful tools to create space on the board regardless of age. To be effective, a strong governance chair or similar director should be empowered to have conversations with board members who aren’t pulling their weight.
In the survey, 44 percent of respondents reveal concern about recruiting tech-savvy directors. While youth is no substitute for technology expertise, and technology expertise isn’t limited to the young, it’s important to remember that younger directors are more likely to have an intuitive handle on technology trends, particularly as relates to the bank’s retail and commercial customers.
But youth isn’t synonymous with engagement. New directors should “bring a vision and new ideas to help bring the bank into the future,” says Christenson.
One of the central topics of conversation at this week’s Bank Audit & Risk Committees Conference hosted by Bank Director in Chicago is whether a bank’s board of directors should have a risk committee separate from its audit committee. And for banks that have already established a risk committee, the question is what responsibilities should be delegated to it.
In one respect, the question of whether a bank should establish a risk committee seems easy to answer because it’s clearly delineated in the regulations. Under the original Dodd-Frank Act of 2010, banks with more than $10 billion in assets are required by law to have one, though that threshold was raised to $50 billion in legislation enacted last month designed to ease the burden of the post-financial crisis regulatory regime on smaller banks.
There is a general consensus among attendees at this year’s conference that a bank shouldn’t base its decision to establish a risk committee solely on a size threshold. “Now that we have a risk committee, I don’t know how we did it without one,” said Tom Richovsky, chairman of the audit committee at United Community Banks, a $12.3-billion bank based in Blairsville, Georgia.
Rob Azarow, a partner at Arnold & Porter, says the decision should be informed by two factors in addition to size. The first is the complexity of a bank, with the presumption being that a bank with a more complex business model should establish a risk committee sooner than a bank with a less complex model. The second factor is dollars and cents—namely, whether a bank has the internal resources at its disposal to essentially split its existing audit committee into two.
It’s worth noting as well, as Azarow points out, that even under the new legislation, the Federal Reserve retains the authority to require a bank to implement a risk committee, irrespective of size. Another point to keep in mind is that even for banks not required as a result of their size to establish a risk committee, once established, it is subject to regulatory oversight.
Approximately half the banks at this year’s Bank Audit & Risk Committees Conference have both types of committees—audit and risk—with many of the others still weighing the pros and cons of establishing both.
Deciding whether to have a risk committee is only half the battle; the other half involves deciding exactly what that committee should do. Should it be vested with all risk-related questions, thereby usurping the authority over those questions from other committees? Or should the other committees retain their authority of relevant risks, while the risk committee then plays the role of overseeing an aggregated view of those risks?
This distinction is clearest in the context of the credit committee, for example. One of the fundamental purposes of a credit committee is to gauge credit risk. It isn’t uncommon, for instance, for a bank to require its credit committee to approve especially large loans. Would the risk committee now handle this?
Generally, the answer is no. The role of the risk committee when it comes to credit risk is broader, focused on concentration risk as opposed to the risk associated with individual credits.
Another place this comes up is in the context of technology and information security. While the audit committee would retain the authority to ensure that current laws, regulations and best practices are being abided by, the risk committee would be more focused on looming threats.
Deciding which responsibilities fall under the risk committee as opposed to, say, the audit and credit committees seems to boil down to the question of whether the issue is backward-looking or forward-looking, tactical or strategic. Issues that are forward-looking and strategic should go to the risk committee, with the rest remaining under the jurisdiction of their home committees.
To be clear, conclusions on when and how to charter a risk committee are far from settled. There are rough best practices, but no overarching consensus in terms of bright lines. Even banks that have established separate risk committees with clearly delineated duties are still in a process of adjustment. They’re happy with their decision to do so, but they recognize that this is more of an evolution than a revolution.
Two years in a row, Mike Morris and his team at the consulting firm Porter Keadle Moore dinged a client bank for what the firm saw as a potential security threat by allowing access to personal email accounts while using company equipment.
Then about a month ago, on a Friday afternoon, Morris, a partner and cybersecurity expert at PKM, got a call. The bank they had written up two straight years for the same potential security lapse had, in fact, been breached by someone using personal email on company equipment, exactly what they had identified as the possible threat.
Such cybersecurity threats are among the most serious for any institution for a multitude of reasons, from fiduciary responsibilities to reputation and beyond. Cybersecurity will be a common topic at the Bank Director’s 2018 Bank Audit & Risk Committees Conference, held June 12-13 in Chicago.
Morris has multiple stories about hacks and phishing scams that have in some way compromised personal data or a customer’s own money.
Another recent case: A customer fell victim to a phishing scam, and the source in China managed to wire $150,000 through another bank before they “got lazy” and tried to draw another $150,000 directly from the customer’s bank. The second transaction, thankfully, was caught by the bank’s compliance team in review.
“That’s happening on a regular basis, and it’s not a new trend, but yeah, it’s happening all the time,” Morris says.
Some of the financial services industry’s most experienced experts paint a dark picture about how prepared—or not—banks generally are for cyberattacks, or perhaps more generally, just threats to customer information that could ultimately pose a risk to the bank.
It’s not a new challenge for the industry. Banks have had training along with regulator attention and oversight for at least a decade on this topic, but with an increasingly vast digital footprint, troves of data and relationships outside the walls of the bank with vendors, the potential threats grow in parity.
“Firms that successfully introduce cutting-edge technologies need to infuse cybersecurity risk management practices throughout the entire development life cycle to identify and mitigate new risks as they emerge,” said Bob Sydow, a principal at Ernst & Young, in testifying before the Senate Banking Committee in late May. “This shift in mindset from thinking about cybersecurity as a cost of doing business to seeing it as a growth enabler is not easy, but it is the only viable path forward.”
The data about cyber threats—not to mention what seems like weekly headlines about data breaches—doesn’t help dissuade any worry that bank leaders or risk officers might have. The 2017-18 Global Information Security Survey by Ernst & Young found nearly 90 percent of some 1,200 bankers around the world said their cybersecurity function doesn’t fully meet their organization’s need. More than a third said their data protection policies were ad hoc or nonexistent, Sydow told senators, just weeks after Facebook CEO Mark Zuckerberg was on Capitol Hill testifying about Cambridge Analytica’s use of the social network’s user data.
“As banks and other financial services firms define their digital strategies, their operations are becoming ever more integrated into an evolving and, at times, poorly understood cyber ecosystem,” Sydow said.
That integration Sydow talked about is an area where there’s considerable risk, Morris says, that should be reviewed and understood by audit committees, risk committees, boards and other bank leaders. Financial institutions are working with an increasing number of third-party vendors for specific services or products, some of which require that vendor to access the data of the bank’s customers. That itself presents a risk, and boards should be especially careful when negotiating contracts that in early draft stages tend to favor the interests of the vendor but are often revised through the negotiation process.
Morris says it should be a top priority for banks to have a right-to-audit clause or confidentiality clause in those agreements, which gives the bank some authority to ensure the data to which they are allowing access is treated properly and kept secure. Boards should also take the opportunity to update or revise long-standing contractual agreements, like those with core system providers, when they come up for renewal.
Many institutions have lengthy contracts with their core technology providers, and with data security a preeminent concern, those renewals should be taken seriously.
“You have that moment of power when you haven’t signed an updated agreement that you can get some of these clauses put in there,” Morris says.
In February of this year, in response to widespread consumer abuses and breakdowns in compliance, the Board of Governors of the Federal Reserve System issued an unprecedented enforcement order against Wells Fargo & Co. that, among other things, requires Wells to submit to the Federal Reserve a written plan to enhance the effectiveness of its board of directors in carrying out its oversight and governance responsibilities, and further restricts Wells’ growth—an action that is typically only imposed on troubled institutions.
In the consent order, Wells agreed to fully cooperate with the Fed in further investigations as to whether separate enforcement actions should be taken against individuals involved in the conduct cited in the order. In connection with entering into the consent order, Wells agreed to replace four directors, three by April and the other by the end of 2018. In addition, on the same date, the Fed publicly released letters of reprimand that it issued to the board of directors of Wells as well as to the company’s past lead director and chairman. These types of supervisory letters usually remain confidential.
While the Federal Reserve’s action was clearly intended to address an egregious situation that involved a breakdown of Wells’ risk management system and resulted in widespread consumer abuses, bank board members and executive management should take note of its statements in the letters of reprimand as they relate to the responsibilities of a board and its leadership, particularly when they become aware of serious matters at the bank, whether related to misconduct, compliance, operations or other areas.
Here are the key governance and oversight considerations noted by the Federal Reserve.
Responsibility of the Board In its letter of reprimand to the Wells board, the Fed noted that it was incumbent upon the board to “carefully evaluate” the company’s risk management capacity and “to oversee” the implementation by management of an adequate risk management framework for the entire company. The Federal Reserve found that the Wells board failed to take sufficient steps to ensure that the bank’s executive management team had established and was maintaining an effective risk management structure. It also found that reporting by management to the board lacked sufficient detail and failed to include concrete plans to address the serious consumer compliance issues Wells was facing.
The Federal Reserve also emphasized that it was the board’s responsibility to ensure that the company’s performance management and compensation programs were consistent with sound risk management objectives and complied with laws and regulations. The letter stated that the lack of effective oversight and control of compliance and operational risks were material factors in the substantial harm suffered by Wells customers.
Responsibility of the Board Chair The letter of reprimand to former Chairman and CEO John Stumpf stated that it was the responsibility of the chairman “to ensure that business strategies approved by the board were consistent with the risk management capabilities” of Wells. It further noted that it was incumbent on the chairman to ensure that the full board had sufficient information to fulfill its responsibilities. The Federal Reserve found that Stumpf failed to take appropriate and timely action to address the compliance issues and improper conduct by Wells employees. Also noted were his actions in continuing to support those senior executives most responsible for the failures and in resisting attempts by other directors to hold the executives accountable.
Responsibility of the Lead Director For financial institutions that have lead directors, the Fed’s letter of reprimand is insightful as to its view of the lead director’s role. The letter stated that former lead director Stephen Sanger “had a responsibility to lead other non-executive directors in forming and providing an independent view of the state of the firm and its management.” The letter noted the failure of the lead director to initiate any serious, robust investigation into the widespread consumer compliance issues that were raised as well as the failure to press management for more information or action after being made aware of the seriousness of the issues. The Fed also noted that Sanger did not perform in a manner consistent with the duties and responsibilities of the lead director that were set forth in Wells’ corporate governance guidelines.
As global businesses and markets are caught in a seemingly perpetual cycle of disruption and adjustment, company leadership and directors are tasked with finding new, innovative ways of communicating and working with shareholders in an increasingly complex and fragmented landscape. This is even more important given the massive technological advancements within the last decade, which have not only shifted the ways in which companies operate, but the means in which businesses and investors convey and share information.
Recent advancements in technology have transformed everyday business processes through digitization, which, in turn, has made cybersecurity a top priority. Moreover, they have made the world a much more connected place, facilitating business at a faster pace than ever before. To help company leadership adjust, new technologies have been developed to help directors and leadership teams improve collaboration and workflow.
Digitization Today’s boards are going paperless, and the reality has become indisputable: directors are turning away from printed documents in favor of digital information that is easy to share and accessible on mobile platforms, like board portals.
Through digitization, directors are now accustomed to heightened levels of speed and efficiency across all business processes. With board portals, corporate secretaries and meeting managers are able to streamline board book creation and tighten information security. The benefits to this technology are clear: easy access to digital meeting information with user-friendly tools for assigning tasks, approvals, consent votes and secure messaging.
We have also observed a growing trend driving increased global demand for board portal solutions: the need to collaborate and share confidential information and documents across internal and external teams in a highly secured environment. The C-suite executives who already use our board portal tools for director-level collaboration are now expanding that capability across their organizations, all through a single sign-on service.
Cybersecurity As businesses shift to digital platforms, data security plays a much bigger role. Companies must closely scrutinize how sensitive information is handled due to the risk of breaches. Cyberattacks are common and can result in significant financial and reputational damage; cybercrime damage costs are expected to total $6 trillion annually by 2021, according to CSO. This makes it especially important for boards and company leadership to take a strategic approach to data protection. Information is being shared in more rapid and innovative formats, and the methods in which boards communicate with shareholders will need to prioritize safety along with accessibility.
Protecting sensitive information should be at the top of a company’s concerns. This is why solutions should comply with strict encryption standards, multi-factor authentication and a completely cloud-less data storage system. Companies can also leverage machine learning and artificial intelligence (AI) to navigate and secure large volumes of data. These technologies can monitor and detect network anomalies that signal potential attacks and prevent further access before data is compromised.
Globalization Due to the digitization of communication channels, we are now able to connect and do business in seconds with people halfway across the world. As technology brings us closer together, it breaks barriers to information accessibility. This ease of information exchange has impacted investing by virtually removing any impediments that once stood in the way of certain markets.
Increased ease of access to information around the world means companies, and particularly company leadership, should ensure key information is digestible for all stakeholders. That’s why being equipped with full translation services for common languages can be advantageous.
Moreover, as globalization continues to facilitate business and investing opportunities, shareholder bases are broader and more diverse than ever before. With the rise of passive investing, companies lack a level of transparency that allows them to know who their stakeholders are. For this reason, it is necessary to take advantage of tools and technologies that provide actionable insights into passive investment data and provide a more comprehensive picture of shareholders.
Looking Ahead As technology continues to augment the ways in which companies operate, boards need to keep pace, ensuring they are communicating with their shareholders in the most efficient and preferred methods possible.
Many banks lack a clear, written deposit strategy and funding plan. For the last several years, that’s been somewhat understandable. After all, deposits flowed into banks and have now reached historic highs, even though banks on average pay little or nothing in interest on the vast majority of those deposits.
Now that’s changing. Deposits are an increasingly important topic for bank boards. We are on the front end of an environment bankers have not seen in almost a decade. The Federal Reserve raised the fed funds target rate by 75 basis points last year, and three more rate increases are expected this year.
Banks already are seeing deposit competition heat up. Close to 64 percent of bankers said that deposit competition had increased in the last year, and 77 percent expected it to increase during the subsequent 12 months, according to Promontory Interfinancial Network’s Bank Executive Business Outlook Survey in the third quarter of 2017. Although in the past banks have had to compete in rising rate environments, we’ve never seen a point in history quite like this one, and it would be wise to assume rising rates will impact deposits, as well as your bank’s funding mix and profit margins.
There are a couple of reasons why the environment has changed. Historically, big banks ignored the rate wars for deposits, a game that was left to community banks. But this time, the new liquidity coverage ratio requirement that came out of the Basel III accords could encourage big banks to get more competitive on deposit rates. The ratio, finalized in the U.S. in 2014, requires banks with more than $250 billion in assets to keep a ratio of 100 percent high-quality liquid assets, such as Treasury bonds, relative to potentially volatile funds. Banks that move toward more retail deposits will have a lower expected level of volatile funds.
Also, banks have a majority of their deposits in liquid accounts while term deposits, such as CDs, are at historic lows. There’s no hard-and-fast rule to know how much of those non-term deposits will leave your bank as rates rise.
As the economy has improved, surging loan growth has put more pressure on the need to grow deposits. Loan-to-deposit ratios are rising, and as banks need to fund further growth, demand for deposits will rise. What this will do to competition for deposits and, therefore, deposit rates, is unclear. We have found that many banks aren’t raising rates on their loans, and the best borrowers can easily shop around to get the best rates. This will put pressure on margins if banks don’t raise rates on loans as interest rates rise.
Still another factor is that people have had a decade since the financial crisis to get comfortable with the benefits of online and mobile banking. Online banks, not incurring costs associated with physical branches, often offer higher interest rates on deposits than traditional banks.
One of the best ways to prepare for the changing environment is to make sure your bank has a written, well-prepared deposit strategy. We’re not talking about a 100-page document. In fact, the asset/liability committee (ALCO) of the bank may need a five- to 10-page report highlighting the rate environment, the bank’s deposit strategy, and alternative funding plans and projections. The bank’s full board may just need a three- to four-page summary of the bank’s deposit strategy, making sure that management is able to address key questions:
Who are your bank’s top 10 competitors, and what are they doing with rates? What new products are they offering?
How will the Federal Reserve’s expected moves in the coming year impact our rates, our margins and our annual net income?
What is our bank’s strategy for contacting our largest depositors and determining their needs?
What new deposit products do we plan to offer, and how will we offer them only to our best customers? Not all customers or deposits have equal value to the bank.
What is our funding plan? In other words, what are our alternatives if we need deposits to grow, and what will they cost? This is perhaps the most difficult question to answer.
While it’s important not to be caught off guard in a rising-rate environment, rising rates can be a good thing for a bank with a solid deposit strategy in place. For the first time in a long time, the wind will be in the sails of bankers. They just need a plan for navigating the changing environment ahead.