Pub. 4 2013 Issue 3

www.wvbankers.org 22 West Virginia Banker W e’ve all been warned about the neg- ative consequences of having “too much of a good thing.” Too much of a good thing, it’s been said, can sometimes be a bad thing. We tell our children that too much candy will give them a stomach- ache. We tell our friends that too many glasses of that fine wine with dinner may mean a headache in the morning. For many community bankers these days, the “too much of a good thing” in their world just might be the rapid and largely unsolic- ited growth in deposits they have seen over the last few years. How is it that deposit growth can be anything but good? Don’t bankers spend a lot of time and go to a lot of trouble trying to accomplish that very thing? It would be a rare community banker indeed, who would not welcome an influx of new money with open arms. Those arms might be a little more welcom- ing, however, if that same banker felt like he had somewhere to go with that new money – like into a new high-grade loan. All Dressed Up and Nowhere to Go And therein lies the rub. For many banks, if not most, this monumental deposit growth has not been accompanied by a commensurate increase in loan volume. So, as deposits continue to pour in, loan growth is flat or, in many cases, actual- ly declining. For banks that have found themselves in such circumstances, their alternatives are either to let the cash pile up while waiting for loans to materialize or to channel these newfound funds into the investment portfolio. Whether one of these courses of action is chosen or a different path is pursued, understanding the nature of this new crop of deposits can be crucial in determining their appropriate deployment. As many of these new depos- it dollars wind up in non-maturing deposit accounts, is it prudent to assume that they will display the same “core deposit” characteristics? Will they behave as they traditionally have with stable balances and low degrees of rate sensitivity? Concern has been expressed by bankers and regulators alike that these new de- posits may not be core accounts at all, but merely the least-worst option for customers more worried about safety of principle than return on investment. If the rush of money into these accounts has in fact been driven predominantly by transitory, fear-inducing influences, will banks see this money rush back out once the owners of these accounts become less fearful? Will the bank’s ability to keep these deposits be incumbent upon paying up for them? And when will all of this happen? Or not? Good questions all. If the managers of interest rate risk could find out the answers to these questions, and a few others, it would certainly give them some guidance into just what might be the best way to portray the behavior of these new, pseudo core deposits when trying to measure and manage their po- tential effects on earnings and capital. The concern voiced by many is that current in- terest rate risk modeling techniques could very well be masking significant risks to not only future income, but also to capital adequacy. Past Performance is No Guarantee of Future Behavior Historically, the various categories of non-maturing deposits are the most stable and least rate sensitive liabilities on the balance sheet. For this reason, wheth- er they are NOW accounts, or savings accounts, or even MMDAs, the tradition- al treatment of these liabilities in most asset/liability models frequently results in them having the longest average lives and highest durations of all deposits. Addition- ally, their beta s, or price sensitivities, are often the lowest to be found on the balance sheet. That’s all fine and well as long as they continue to behave as they custom- arily have. This then begs the question, “What if they don’t?” Do Surging Deposits Mean Surging Risks? By Lester Murray Sr. Vice-President/Financial Strategies Group The Baker Group