JUNE 13, 2019
2019 FMS Forum: Funding for the Times
By Hilary Collins, Specialist, Publications and Research, Financial Managers Society
The 2019 FMS Forum is almost here and Shawn O’Brien from QwickRate was happy to check in ahead of the happenings in Boston to share a sneak peak of his breakout session, “Funding for the Times: All Options on the Table.”
FMS: What are some of the unique funding pressures that financial institutions are facing in 2019?
O’Brien: For most of the last decade, every financial institution experienced continuing increases in deposits – often to the point of not wanting more. However, that situation began to change over the last year or two. In 2018 and certainly into 2019, institutions have seen the availability of funding diminish, while the cost of funding has increased.
Further compounding the problem is the fact that over the same 24 months or so, many institutions also experienced an erosion of their net margins. Now, as deposit prices continue to climb, it’s very difficult for these institutions to pass along increases in loan rates to their customer base – a base, it should be noted, that’s being threatened by a growing number of highly competitive fintech companies and neo-banks.
So most of today’s community institutions are being squeezed. On one side sit the larger banks that are heavily investing in technology, and therefore not offering customers better deposit rates. On the other side are fintech companies offering higher rates (and often better technology, too), but with no regard for personal relationships. Occupying the space in between are the community institutions dealing with customers asking for both higher deposit returns and costly improvements in technology.
FMS: How do examiner expectations play into these pressures?
O’Brien: Examiner expectations are always important. If asked, examiners would say that currently most banks (more than 80%) merit either a 1 or 2 liquidity rating, meaning that the institution has satisfactory liquidity levels and funds management practices, has access to enough sources of funds with acceptable terms and has only modest weaknesses (if any) in its management of funds. As examiners foresee the industry moving from an expansion state to a peak point (perhaps already reached) and then moving closer to a downturn, the regulators begin to become more concerned about banks sliding to a liquidity ranking of 3. This would indicate that an institution’s liquidity levels and funds management practices need improvement, that the institution may lack ready access to funds with reasonable terms and that it may even have significant weakness in its processes for managing funds.
In that case, the financial institution can expect examiners to scrutinize its liquidity management processes more sharply – making sure the institution is utilizing multiple funding sources, is maintaining ready access to contingency funding, is stress testing its liquidity sources and is strictly monitoring its capital to keep from slipping below well-capitalized status during a possible downturn.
FMS: What are a few things attendees should take away from your session?
O’Brien: I would like them to leave with a better understanding of their funding sources and how to best utilize them all. I would like for them to know the examiners’ perspective of where we are in the current banking cycle, and how that perspective might affect the evaluation of their institution at exam time. I also want them to understand the different points of pressure that can weaken their institution’s overall liquidity position.
Be there for this session and all of the other great educational and networking opportunities in Boston – register today!