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Context: The Federal Reserve’s 11 increases in the fed funds rate since March 2022 have changed bank deposit dynamics. NeuGroup senior executive advisor Jerry Olivo, a former banker who leads NeuGroup for Regional Bank Treasurers, says the higher rate environment means institutions now have to compete for so-called sticky deposits as customers move money elsewhere.
- “Many banks will offer a premium rate for the deposit types they value if they have seen a runoff of those deposits as clients move into higher-rate money funds or Treasury bills,” Mr. Olivo explained. “They will not offer the premium for other types.”
- Banks are more willing to pay higher rates for funds that are likely to remain on deposit during a time of liquidity stress. Those include retail accounts as well as commercial operating accounts and deposits of clients with good, longstanding relationships with the bank, according to Mr. Olivo.
- Given that banks evaluate the “stress liquidity attributes of a deposit” and use that analysis to decide when to pay premiums, corporates can position a portion of their deposits for higher rates by better understanding the attributes that banks seek in a deposit, he added.
Member question: “I am curious if anyone is willing to share the types of criteria or qualification to grant deposit rate premiums? We look at each customer/account on a case-by-case basis, but want to start using a more formulaic approach with criteria for our salesforce to reference when making requests for rate premiums. Any information is appreciated.”
Peer answer 1: “We don’t have a formulaic calculation or process for exception pricing. I would say we utilize ‘informed subjectivity.’ Our profitability team has created an easy access customer relationship link that captures the entire relationship, so we can determine the depth of the relationship. That, combined with daily cost of funds and internal approval levels, allows us to target reasonable pricing levels.”
Peer answer 2: “I would agree that ‘informed subjectivity’ would describe our process. We do establish no-call exception guidelines where the line of business can approve certain exceptions without escalation to senior managers. Over that level, exceptions need approval by me or the executive in charge of the line of business. Only the most sensitive requests usually make it to that level.”
Peer answer 3: “We have established exception-pricing authority relative to the level of the fed funds upper bound rate. Bankers and our deposit working group have specified levels of authority in basis points relative to that rate, and we adjust that authority as necessary.”
Final thoughts. Reviewing the answers, NeuGroup’s Mr. Olivo observed that a subjective, qualitative approach to determining deposit premium criteria is common. However, he said more regional banks are going down the path to create a more structured liquidity and pricing model.
- “Deposit pricing committees within the banks are looking to define and implement these pricing criteria so that their client-facing teams can make quick decisions when in the field rather than have to come back for centralized approval—without overpaying for less valuable deposits,” he said. “For large corporate clients, there may be more one-off negotiation based upon the relationship, but with upper bounds established via qualitative and quantitative criteria.”
