Pub. 15 2018 Issue 4

Issue 4 • 2018-2019 11 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S Banks that use reciprocal deposits can enable a large, local depositor to access multi- million-dollar FDIC protection while developing more local relationships than they otherwise might and using the underlying deposits to fund more loans. The webinar featured insights from representatives of Farin and Associates, Sandler O’Neill + Partners and Darling Consulting Group. Key points that came from the webi- nar included: • Don’t fixate too much on interest rates. Instead, dive deeply into your current deposit base and study it to develop more meaning- ful long-term strategies. Rates are important, but they should be a guide for goals, not the only factor. • Deliver products that your cus- tomers want. Many banks offer money market accounts which customers want, but sometimes, the pricing has not been recon- ciled with the current market, and that can make a difference. Also, if your bank’s deposit prod- ucts are not going to satisfy its asset and liability management goals, consider developing more attractive products. • Think long term. It’s easy to be consumed by the short-term growth or retention of deposits or overall cost of funds, but a long game should be played as well for the stability and longevity of the institution. Considering how short- term objectives play into long-term goals and successful strategies can make a big difference. Since the webinar was held, a new opportunity to help banks compete for retail deposits has emerged from one of the lesser-known provisions put in place through the Economic Growth, Regu- latory Relief, and Consumer Protection Act. It can help banks that utilize recip- rocal deposits immediately. Specifically, the act changed the classification of most reciprocal deposits so that they are no longer considered brokered. Reciprocal deposits are deposits that a bank receives through a deposit placement network in return for placing a matching amount of deposits at other network banks. Placing funds using a deposit placement network enables a bank to accept and help make eligible for FDIC insurance deposits beyond the standard $250,000 by dividing and distributing the deposits to oth- er banks in the network, while at the same time receiving an equal amount of deposits from other network banks that are doing the same thing with their customer funds. Banks that use recip- rocal deposits can enable a large, local depositor to access multi-million-dollar FDIC protection while developing more local relationships than they otherwise might and using the underlying deposits to fund more loans. Banks can take advantage of the new treatment of reciprocal deposits by: • Seeking more large-dollar, locally-based customers that they may have been hesitant to approach before • Attracting more large-dollar deposits from locally-based busi- nesses and other types of cus- tomers that may be keeping their deposits with larger banks that they perceive as “too big to fail” • Replacing higher amounts of more expensive collateralized deposits • Replacing higher amounts of more expensive, less stable listing service deposits • Replacing higher amounts of wholesale funding • Pursuing more government and financial institution deposits as the nation’s largest banks—which are subject to liquidity coverage ratio calculations—look to shed these deposits, providing an opening for community banks to win these deposits and to go after the whole banking relationship • Locking in more low-cost funding now as a hedge against higher rates in the future, recognizing that large deposits from in- stitutional investors are good targets for banks looking to take advantage of the low deposit bet as associated with reciprocal deposits and to secure customers for longer terms The bottom line is that the battle for deposits is intensifying, making now the time to discuss what success looks like and to determine the best strategy to get there. n To learn more about the reciprocal deposits provision enacted in the regulatory relief package signed in May, visit www.promnetwork.com/no- longer-brokered or contact Chuck McBrayer at cmcbrayer@promnetwork.com .