Loved the webinar. Thanks Rob and Scott. As I reflect on the webinar content, I will offer a few observations:
I respect the perspectives that we are in uncharted territory so the fixed paradigms from the past cannot be casually applied with great confidence. We must be in a posture of agility and learning as we go forward.
Scott is so right in this webinar that bankers will ultimately find success in future deposit gathering only when they listen and respond to what depositors want. Depositors in a rising rate environment want competitive rates and short commitments. Offering old-fashioned CDs will not be very effective as we go forward and try to compete with FinTechs and Neobanks. Offering high-yield money market accounts will not optimize profitability because they create little durable competitive advantage for banks that issue them. Term deposits in the future will look and act like mutual funds with fixed interest rates and daily redemption options. Bankers can offer these new structures now, but most are unaware of this opportunity. Reminds me of when CDARS was introduced and how it changed the industry in a very powerfully positive way.
The reality of deposit betas over the next few years will be less about how much deposit rates move in coordination with the Fed Funds rate and more how deposit costs move with the bank's loan/core deposit levels with the key being the loan pricing betas. Bankers are living in a bifurcated world with local loan and deposit volumes/spreads and simultaneously wholesale interest rate markets that expand their options to fund and invest. The successful will navigate both local and wholesale worlds simultaneously. Opting out of the wholesale interest market will not lead to robust success. This means that some organizations that don't have a surplus of funding will tend to move with the bond market while those that have surplus will seek to wait on deposit pricing adjustment even though the spreads on deposits are expanding and the spreads on loans are shrinking.
I am aware of many banks in March that made coterminous spreads of over 150 basis points compared to wholesale funding on term deposits. As wholesale rates have moved up bankers have lagged on pricing on both loans and deposits. As this has happened the intrinsic spreads on deposits have expanded and the spreads on loans have diminished. The best bankers today are effective in getting lenders to properly recalibrate loan pricing given market interest rates.
The demand for deposits is a derived demand. Demand for deposits is shaped by what the deposit funding can be invested in - loans and investments. When market rates of interest rise the bankers are confronted with the opportunity that they could invest deposits in investments. That is a real option that some bankers will navigate quite successfully, and others will not.
We should stop discussing the threats of recession as though recessions are all of the same duration and intensity. Any realistic participant in the economy needs to always recognize future headwind risks. We need to stop treating the ever-present risk of economic slowdown as if we have just now created that risk. Most certainly, we need to stop assuming that the shape of the yield curve has sovereign control over the state of the economy. In economics we always must recognize that we are allocating perpetually scarce resources among unlimited wants and needs. The economy can grow or shrink, but it will forever be evolving.
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Neil Stanley
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Original Message:
Sent: 04-04-2022 16:06
From: Rob Blackwell
Subject: [Webinar] Why Now Is the Time to Lock in Cheap Funding
Last chance to register! Don't forget to sign up for our webinar this Wednesday, April 6 at 2:00 PM ET, where Scott Hildenbrand, Chief Balance Sheet Strategist and Head of Financial Strategies at Piper Sandler, will be sitting down with me to discuss how banks can seize opportunities in today's low-rate environment before they're gone-and why waiting just isn't an option.<o:p></o:p>
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Rob Blackwell
Chief Content Officer and Head of External Affairs
IntraFi Network
Arlington, VA
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