Banks are faced with two disparate pictures when they look at their cost of funds in 2022. Funding costs are not exploding, thus far anyway, from the highest performing banks on down. Consumers, on the other hand, are treated to more and better options for safety and higher yield with each passing month. It’s a funding landscape not seen since before the 2008 financial crisis.
Since 2008, courtesy of the Federal Reserve, a 2-percent return has been the best a depositor could get, whether they were building a rainy-day fund in a savings account, cobbling together a mortgage down payment, preparing for retirement, or earning income from low-risk sources. Now, in a rapid rise of historical proportions, the Fed Funds rate has soared to 3.8 percent, up from near zero, boosting U.S. Treasury bonds to nearly 5 percent. Private firms have gone higher to attract deposits, such as Edward Jones offering 4.70 percent for a year-long certificate of deposit or Synchrony promoting 3 percent on savings accounts.
Competition is on the rise, but are these developments good news or bad for banks?
If you talked to any banker during the last 15 years, “rates-up” environments aren’t the boogeyman. In fact, the current rate movement has been on the industry’s wish list for a long time. Many wisely view consumers’ widening options on both retail and commercial accounts as a threat to margins. However, many also see a welcome opportunity to focus on relationship banking — only now bankers can exercise that muscle at both ends of their net interest margin.
Depositor feelings of futility
Before inflation convinced the Fed to change its tune, savers and retirees struggled.
Among Millennials and Gen Z — the consumer cohorts now in their 20s and 30s — saving to purchase a home is a priority for less than 20 percent of Americans. That same cohort, though, says buying a home is a top priority, said Kathleen Craig, CEO of Plinqit, a saving technology platform founded in 2018.
Homebuyers need enough for a 3 percent down payment, “they just think they cannot afford it,” said Craig, a former Michigan community banker, who shared consumer saving data on a recent webinar with BankBeat.
Consumers under the age of 40 can hardly be blamed for this savings pessimism. The period of historically low returns on safe, FDIC-insured deposits has lasted so long that the returns available now are outside of their experience. Not so for the Greatest Generation and Baby Boomers, who remember mortgage rates above 12 percent and year-long CDs paying 10 percent. The young are now incentivized to join their parents and grandparents and learn quickly about banking products they’ve never used.
Pressure built over time
New consumer awareness is building on top of other deposit trends, bringing with it an environment with a new set of unknowns.
Since the Federal Reserve began its efforts to stimulate the economy, regulators have changed the rules for deposit products, observed Neil Stanley, CEO and Founder of The CorePoint in Omaha, Neb. “The Federal Reserve Board removed the prohibition on paying interest on commercial accounts. Regulators also removed rules limiting the number of times consumers can move funds out of a savings account,” he said. “No bank will rush to pay interest on commercial accounts, and transactions on savings accounts aren’t onerous in themselves, but they create even less regulatory friction than before for rate competition and depositor movement.”
Banks are already feeling pressure on funding costs, but how that pressure persists or increases through time will determine the impact on bank balance sheets, said Brian Leibfried, co-head of clients insights and analytics at Performance Trust, Chicago. “We have pressure already right now, and more is building,” he said. “Now it is a question of the duration of time that deposits stay under pressure. How fast will money move when all generations — some for the first time, and others based on experience — realize they not only can chase higher returns but can do so quickly because of technology?”
For most banks, a comparable scenario to the current rate environment occurred in the late 1990s and mid-2000s, Leibfried observed. “Back then it was hard to break up with a bank,” he said. “If the current pressure on deposits is sustained for a significant period of time, the next few years could be worse than the 90s because of the ease of moving on; and the fact that most bank deposits are just one minute away from maturity.”
In fact, only 7 percent of core deposits even have maturities, Stanley agreed. “That’s the lowest level of tied-down deposits going back more than 35 years,” he said. “Bankers have come to love non-interest bearing. Some 93 percent of accounts are either non-interest bearing, with no commitment from the depositor whatsoever, or interest-bearing and the depositor can move anytime.
“People are going to put their money to work,” he added. “We’re going to see deposit balances decay, either banks will have to pay to keep them or they’ll need to understand and tailor their products in ways valuable to depositors.”
Brian Love is head of banking & fintech at Travillian, a nationally focused executive search, strategy and talent advisory boutique dedicated to exclusively serving the financial services industry. Its banking and fintech practice focuses on talent recruitment and succession planning at financial institutions generally under $50 billion in assets. For more information, please visit www.travilliangroup.com and for more coverage of the deposit landscape at www.travilliannext.com.