Banks awash in deposits need to prioritize active accounts making use of services that generate fees and revenue.
Originating loans as the pandemic recedes and the economy revives is a major challenge for banks today—but so is the surge in deposits since spring 2020 and just what to do with them given the lack of precedent.
- Consumer and commercial deposits increased by more than $3 trillion, or roughly 20%, since the onset of pandemic through the end of December, according to Novantas, a data and solutions firm specializing in financial services. Roughly two thirds of the increase was and remains commercial deposits (see chart).
- With deposits coming in from all angles, banks have focused on the “primacy” of their customers to emphasize deposits associated with so-called operating deposits used for day-to-day needs and discourage non-operating deposits—excess cash.
- The unprecedented nature of Covid-19 and consequently the lack of applicable historical data has left banks uncertain about how to model those deposits’ behaviors, leading them to rely more on non-modeled and qualitative estimates.
Stimulus overdrive. The surge in commercial deposits was sustained throughout 2020 and gained steam at the start of 2021 as additional stimulus coincided with year-end seasonality.
- Pete Gilchrist, co-head of global advisory at Novantas, said in a presentation to regional bank treasurers that banks now have “more liabilities than attractive assets to invest them in,” and they must be wary about taking on additional deposits that would result in cost rather than income.
- Contrary to the norm, Mr. Gilchrist said, “Banks are actively discouraging certain deposits coming on to their balance sheets.”
Questions and more questions. The deposit surge poses critical balance sheet management questions spanning measurement, management and governance, starting with what is the aggregate surge-balance impact, the drivers and duration of the surge by customer type, and what factors could affect surge stability.
- Also important to consider are the actions management should take based on surge-deposit measurement outcomes, Mr. Gilchrist said, including deposit pricing and the allocation of cash and investment securities, and the overarching framework to guide these decisions in the new environment.
- Governance questions include whether to adjust surge-deposit valuations and which analytics to prepare for the asset liability committee.
Model concerns. Alas, the unprecedented nature of the pandemic and the trillions of dollars in federal stimulus to fuel recovery make output from the models constructed in the wake of the 2008 financial crisis highly questionable.
- “If the world after the pandemic looks different than before, then models relying exclusively on data from before the pandemic will be suspect,” Mr. Gilchrist said.
- A bank treasurer echoing peers’ sentiments said his institution is “just getting overrun with unabated inflows of deposits.” He added that third-party models built over the last several years “didn’t pass muster, and we had to go back to a simplistic kind of trailing average decay model, which shortened our deposit lives a lot.”
Emphasis on primacy. To stem the flood of excess deposits, banks should focus on measuring and ranking accounts by “primacy”—highly active accounts whose deposits can lead to loans and banks fee services down the road, typically checking accounts for consumers and especially businesses.
- “When an account is opened, is that someone who wants to establish a primary relationship and borrow money and use services from the bank, or are they just parking deposits so the bank loses money?” Mr. Gilchrist said.
- He added that that deposits of the biggest six commercial banks have grown less quickly because they’ve succeeded in identifying those primary customers.
- “There’s a lot of conversation today between treasury and the commercial business around making sure the institution knows what a higher quality commercial deposit is,” Mr. Gilchrist said.