Sometimes our thinking goes like this --- if you buy with yields down and prices up and the Fed decides to reverse course then liquidity leaves your bank. Upon which rates rise --prices fall and your cash balance decreases. Now you are looking for funding -- the bond portfolio is under water and the rates for wholesale funding begin to rise. Faced with the choice of selling bonds at a loss or buying money in the wholesale market you choose the later. More times than not the price of wholesale funds is more than what some of the bonds are yielding you just bought. Typically you choose the wholesale market because let's face it, reporting bond losses are never a fun thing. We don't have to look back too far –end of 2019 and into 2020 CDARS was selling money at around 2% and balance sheets were levered. Honestly if you think rates are going to rise --stretch your liabilities –take in funds to sit on until the rates go up. You will have plenty of dry powder to deploy in a better rate environment. We actually have been pursuing new deposit relationships while folks have money and many banks are chasing them away. Maybe we can hang onto some of these customers if and when times change--- and they always change.
Having said that one reason the rates may NOT go up even in the face of persistent inflation is the increased interest expense to the US Treasury. This is a very tough spot for Chair Powell and Secretary Yellen.
Many ways to go and nobody really knows –the last two years should have drove that point home.
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John Klute
Executive VP & CFO
People's Bank of Seneca
Seneca, MO
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Original Message:
Sent: 11-17-2021 12:43
From: Barb Rehm
Subject: Banks Bought Fewer Securities in Q3 in Anticipation of Higher Rates
A preference for holding cash over investing in securities became clear in the third quarter, according to this week's complimentary post from S&P Global Market Intelligence. Banks over $50 billion in assets, in aggregate, increased cash holdings by twice as much as securities holdings – a $157 billion increase in cash and its equivalents compared to $70 billion increase in securities. Cash increases outpaced bond holdings growth at 15 of the 27 institutions, Market Intelligence reported. That is a switch from the second quarter, when most of the big banks added more securities than cash.
How about you? Is your bank making a similar shift? Why/why not?
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Barb Rehm
Senior Managing Director
IntraFi Network
Arlington VA
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