Bank Director | Deposit Insurance Archives

New Understanding Emerging Around Uninsured Deposits

Posted on April 14, 2023 at 12:01 am.

In the wake of the March banking crisis, boards and management teams may want to reexamine the assumptions and modeling around their depositor base, especially when it comes to their large accounts.

An uninsured deposit is any deposit in excess of the $250,000 deposit insurance limit. In the past, deposits that were transactional or operational accounts could have been seen as “core” for a bank, helping it maintain liquidity cheaply. That view may be evolving, aided by the failure of two regional business banks and continued competition for deposits. Complicating — and accelerating — this issue is the ease of technology that large depositors can now use to move their money.

“One clear takeaway from recent events is that heavy reliance on uninsured deposits creates liquidity risks that are extremely difficult to manage, particularly in today’s environment where money can flow out of institutions with incredible speed,” said Federal Deposit Insurance Corp. Chair Martin Gruenberg in late March in written Senate testimony.

Uninsured deposit runoff led to the closures of Santa Clara, California-based Silicon Valley Bank and New York-based Signature Bank, two regional business banks. At the end of 2022, uninsured deposits were 88% of total deposits at Silicon Valley and 90% of total deposits at Signature, Gruenberg said. He added that the top 10 depositors at Silicon Valley had more than $13.3 billion in aggregate deposits.

“I’m not sure that a lot of folks gave too much thought to uninsured deposits prior to what happened over the last couple of weeks,” says Jeff Davis, managing director of Mercer Capital’s financial institutions group. “There’s always been risk that the deposits could move, it was just much more pronounced than I ever perceived.”

While concerns about the industry’s solvency seem to have abated since the apex of the crisis, banks still face a competitive funding environment. Total bank deposits were $19.2 trillion at the end of the fourth quarter 2022, down for the third consecutive quarter, according to the FDIC. Insured deposits increased during the quarter but not enough to offset the loss of large accounts.

That competition for funding showed up as the top strategic challenge bank leaders believe their organization faces this year in Bank Director’s 2023 Risk Survey; the survey was conducted in January, before the March banking crisis. Even then, 61% reported that their bank has experienced some deposit loss, with minimal to moderate impacts on their funding base; 11% said that deposit outflows had a significant impact on their funding base.

Deposit outflows, especially among uninsured accounts, has underlined the importance of bank liquidity management strategies and the need to update deposit stability modeling and assumptions. “Most banks are overestimating … their deposit value,” wrote Chris Nichols, director of capital markets for SouthState Bank, in a recent post. SouthState Bank is a unit of Winter Haven, Florida-based SouthState Corp., which has $44 billion in assets.

Banks often use a static decay analysis to calculate how long deposits will remain on the balance sheet, but Nichols believes this analysis may lead banks to overestimate the stability and value of these deposits. Instead, he recommended using models that can incorporate several economic scenarios and variables.

Neil Stanley, founder of bank deposit consultancy firm The CorePoint, agrees that static decay studies may become less accurate going forward. He argues that that historical data used in those models is less predictive, since rates were exceptionally low for the last 15 years.

“I am certainly not saying there’s no stickiness in these accounts, but I can tell you that we are going to discover what is sticky and what’s not,” he says. “Decay studies will say that a checking account has a life of eight to 10 years. On what basis? If you pay nothing on a checking account for the next two years, [do you really think] that none of those deposits will leave?”

Beyond updating deposit models, Davis says that boards and executives should incorporate hypothetical tail events and potential responses in their strategy overviews, reexamine policies that will govern any emergency liquidity actions and ensure collateral is in place to access external wholesale liquidity. They should try to get a sense of their bank’s depositor base, deposit types and the largest accounts, and should be attuned to any changes in the liquidity profile or risk since March 2020. One question he recommends directors ask are what strategies can management quickly employ in the face of an unexpected outflow of large depositors.

Already, some banks with a heavy commercial focus have published disclosures around their deposit mix. Kansas City, Missouri-based UMB Financial Corp., which has $38.5 billion in assets, has filed two updates about its deposit base ahead of its earnings release, including period-end deposits, deposits by business line, customer segments, length of relationship and estimated uninsured deposits.

Davis adds that banks may also want to educate depositors on their options and explore additional deposit coverage products, such as sweep and reciprocal accounts that can expand insurance coverage for large accounts. In Bank Director’s 2023 Risk Survey, popular liquidity management options included raising interest rates offered on deposits or borrowing from a Federal Home Loan Bank. Less popular options among respondents included raising brokered deposits, using participation loans, tightening credit standards and using incentives to entice depositors.

“There’s going to be a little bit of risk in every deposit franchise, but for the vast, vast majority of banks, it is not an existential risk,” Davis says. “It is something to be informed of and monitor.”

The Latest Model of Modern Banking

Posted on January 18, 2019 at 3:03 pm.

Written by Jake Lowary

Most people assume that fintech companies are out to take business away from banks, but what if the opposite is true?

What if, instead of being a threat, fintech companies actually open up new opportunities for banks?

That’s what a handful of banks are exploring right now. They’re doing so by essentially white-labeling deposit insurance, regulatory expertise and access to credit platforms.

You can think of it as a partnership that leverages a fintech company’s strengths on the front end of the customer experience, with attractive and refined digital interfaces, as well as a bank’s strength on the backend, by providing access to safe and secure financial products.

It’s a classic win-win situation.

One bank pursuing this course is TAB Bank, an online bank based in Ogden, Utah, with $711 million in assets.

“We came to the conclusion that we would build our strategy around how we think the market will look in two to five years, not how it behaves today,” says Curt Queyrouze, president of TAB. “What we determined was that once consumers try a digital interaction, they stay in that lane.”

Queyrouze has been cultivating this model for years.

The 20-year-old online bank has “sponsored” non-banks before who wanted access to the Visa and MasterCard credit platforms, says Queyrouze. Then TAB began working with marketplace lenders and offering traditional transaction accounts—in other words, white-labeling banking services to its partners.

“To the extent we can be the infrastructure for that cash account that attaches to whatever payment systems are out there, yeah, there’s a lot of benefit to that,” says Queyrouze. “As traditional banks we can hold that money, we can insure it and then we can take that money and turn around as the traditional banking model has always been and lend out that money, (or) use it in other ways to create profitable margin.”

The Bancorp Bank is pursuing a similar course. The $4.4 billion online bank headquartered in Delaware makes it clear what their model is all about: enabling non-bank companies to offer bank-like products.

“Take a close look behind some of the world’s most successful companies: that’s where you’ll find The Bancorp,” the company boasts.

The Bancorp backs Varo Money, for example, a mobile app offering users insured deposits, fee-free ATM withdrawals, interest-bearing savings accounts and personal loans in 21 states. (Varo Money was among the first fintechs to apply for the new national charter offered by the Office of the Comptroller of the Currency last year.)

Yet another bank pursuing a similar strategy is Cross River Bank, a New Jersey-based bank with $1.2 billion in assets.

Getting back to TAB, another epiphany came to Queyrouze in late 2018 at one of the biggest financial services conferences of the year.

Queyrouze thought about all the money being spent to lure new customers by both banks and non-banks.

As Queyrouze saw it, this gave TAB two potential paths to follow.

One would require a massive marketing budget to compete against bigger banks and fintech companies in the competition to acquire customers. The other was to stick to what it knew on the backend—namely, banking—while leveraging the strength of fintech companies on the frontend.

“While we do have the option to market against this tide, we also have the opportunity to build a banking infrastructure to align with the fintech world and provide banking services to support their client base,” says Queyrouze.

In short, small banks like TAB don’t have the resources to compete in the digital realm against larger peers. Nor can they pump money into a national marketing blitz to grow their customer base.

But they can stick to what they do just as well as any bank regardless of size—banking—and let fintech partners handle the rest.

How the New FDIC Assessment Proposal Will Impact Your Bank

Posted on August 14, 2015 at 10:18 am.

Written by Michael Shumaker

In June, the Federal Deposit Insurance Corp. (FDIC) issued a rulemaking that proposes to revise how it calculates deposit insurance assessments for banks with $10 billion in assets or less. Scheduled to become effective upon the FDIC’s reserve ratio for the deposit insurance fund (DIF) reaching a targeted level of 1.15 percent, these proposed rules provide an interesting perspective on the underwriting practices and risk forecasting of the FDIC.

The new rules broadly reflect the lessons of the recent community bank crisis and, in response, attempt to more finely tune deposit insurance assessments to reflect a bank’s risk of future failure. Unlike the current assessment rules, which reflect only the bank’s CAMELS ratings and certain simple financial ratios, the proposed assessment rates reflect the bank’s net income, non-performing loan ratios, OREO ratios, core deposit ratios, one-year asset growth, and a loan mix index. The new assessment rates are subject to caps for CAMELS 1- and 2-rated institutions and subject to floors for those institutions that are not in solid regulatory standing.

While the proposed assessment rates reflect a number of measures of an institution’s health, provisions relating to annual asset growth and loan mix may influence a bank’s focus on certain categories of loans and the growth strategies employed by many community banks in the future. We’ll discuss each of these new assessment categories in turn.

One Year Asset Growth
Under the proposed assessment rules, year-over-year asset growth is subject to a multiplier that would have, all other things being equal, the effect of creating a marginal assessment rate on a bank’s growth. In the supporting materials for the FDIC’s rulemaking, the FDIC indicates that it found a direct correlation between rapid asset growth and bank failures over the last several years. But while organic asset growth is subject to the new assessment rate, asset growth resulting from merger activity or failed bank acquisitions is expressly excluded from the proposed assessment rate. This approach is somewhat counterintuitive in that most bankers would view merger activity as entailing more risk than organic growth or growing through the hiring of new teams of bankers. While the new assessment rate might not be significant enough to impact community bank growth strategies on a wide scale, it may offset some of the added expense of a growth strategy based upon merger and acquisition activity.

Loan Mix Index Component
This component of the assessment model requires a bank to calculate each of its loan categories as a percentage of assets and then to multiply each category by a historical charge-off rate provided by the FDIC. The higher the 15-year historical charge-off rate, as weighted according to the number of banks that failed in each year, the higher the assessment under the proposed rules. Unsurprisingly, the proposed rules assign the highest historical charge-off rate (4.50 percent) to construction and development loans, with the next highest category being commercial and industrial loans at 1.60 percent. Interestingly, the types of loans with the lowest historical charge rates are farm-related, with agricultural land and agriculture business loans each having a 0.24 percent charge-off rate.

While the new loan mix index component is a clear reflection of the impact of recent bank failures on the current assessment rates, it may also create economic obstacles to construction lending, which continues to be performed safely by many community banks nationwide. Despite these positive stories, there is no doubt as to the regulators’ views of construction lending—in conjunction with the new Basel III risk-weights also applicable to certain construction loans, community banks face some downside in continuing to focus on this category of loan.

However, when considering the asset growth and loan index components together, community banks that have a strong pipeline of construction loans may have added incentive to complete an acquisition, particularly of an institution in a rural market. Not only can the acquiring bank continue to grow its assets while incurring a lower assessment rate, it can also favorably adjust its loan mix, particularly if the seller has a concentration of agricultural loans in its portfolio. In general, acquirers have recently focused their acquisition efforts on metro areas with greater growth prospects, but the assessment rules may provide an incentive to alter that focus in the future. In many ways, the proposed assessment rates provide bankers an interesting look “behind the curtain” of the FDIC, as this proposal clearly reflects the FDIC’s current points of regulatory concern and emphasis. And while none of the components of the proposed deposit insurance assessments may have an immediate impact on community banks, some institutions may be able to reap a substantial benefit if they can effectively reflect the new assessment components in their business plan going forward.