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FHLB Des Moines and Darling Consulting Group
Current Issues in Liquidity ManagementThursday, August 8th │ 3:00 PM CT
Examine key business issues and trends to help defend your liquidity position, understand key requirements of a comprehensive liquidity management system and learn why your management strategy and philosophy are crucial.
Wholesale Funding: Perception Versus RealityThursday, August 15th │ 3:00 PM CT
In today's economy, consider how wholesale funding can support your earnings challenges and develop a meaningful and cost-effective funding game plan to support the growth of your institution.
www.fhlbdm.com/products-services/advances/2019-funding-products-webinar-series
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� Risk Management Strategy & Solutions �
© 2019 Darling Consulting Group, Inc. • 260 Merrimac Street • Newburyport, MA 01950 • Tel: 978.463.0400 • DarlingConsulting.com
Current Issues in Liquidity ManagementFHLB Des Moines Webinar
August 8, 2019
Bob Lallo, Managing [email protected]
© 2019 Darling Consulting Group, Inc. Page 4
Definition
The Ability to Raise Money Quickly,
Without Principal Loss
At a Reasonable
CostLiquidity
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Liquidity – Where Do We Start?
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First…Addressing Regulatory Concerns
“The declining liquid asset cushions and increased use of potentially non-stable liquidity sources…suggest that small banks as a group are increasing their liquidity risk profiles…” – FDIC Supervisory Insights, Summer 2017
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First…Addressing Regulatory Concerns
Loan growth continues to outpace deposit growth
Banks have shifted cash flows from investments into loans
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60657075808590
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Loans/Assets
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Continuation of the Liquidity Dilemma
• Loan growth outpacing deposits• Deposit pricing pressures (Flat/Inverted Yield curve)•Wholesale funding levels increasing
• On-balance sheet liquidity under pressure• Use of “potential volatile liabilities” PVL - funding sources causing concern
Industry Headwinds
• Deposit concentrations/Wholesale concentrations• Identify “at-risk” deposits• Understand and manage deposit attrition
Regulatory Concerns
• NOT a regulatory compliance exercise• Stresses that fit your bank• Remediation plans a must
Deposit Stability and Liquidity
Stress Testing
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Liquidity Management: 5 Areas of Focus
1. Identify Your Liquid Asset Cushion
2. Quantify and Assess Potentially Volatile Funding “PVL”
3. Revitalize Your Risk Monitor
4. Develop a Dynamic Forecast & Stress Test Framework
5. Deposit Strategies to Improve Liquidity
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Identify Your Liquid Asset CushionIdentify Your Liquid Asset Cushion
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On-Balance Sheet Liquidity
Tight On-Balance Sheet LiquidityStrong On-Balance Sheet Liquidity
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Total Liquidity Position
Reserve based on concentrations
Available borrowing capacity vs. wholesale reliance
Brokered capacity
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Strategy Considerations
u Keep cash to work – Fully Invested in Investments/Loans
u Identify ability to shift liquidity into loans
u Consider more of a defensive deposit strategy
u Maximize current FHLB & alternative funding sources
If “stronger” liquid assets then consider:
u Define liquid asset cushion
u May have to be more offensive in deposit pricing strategies
u Consider alternative pledging options (FHLB/ICS)
u Maximize current FHLB & alternative funding sources
u Defend with “Total” liquidity
If “tighter” liquid assets then consider:
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Maximize Liquidity Yield – Keep Cash Invested
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Quantify and Assess Potentially Volatile Funding “PVL”
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Funding Types & Potential Risk:
• FHLB Advances• Brokered Deposits• Listing Services Deposits• Municipal Deposits• High Rate Deposits (based on national rate cap)• Uninsured Deposits • Single Source Concentrations (depositors that control 2% of total
deposits)
Regulatory Concerns
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Product National Rate Rate Cap
Savings 0.10 0.85
Checking 0.06 0.81
MMDA 0.18 0.93
6M CD 0.39 1.15
12M CD 0.66 1.33
24M CD 0.84 1.52
36M CD 1.00 1.64
Product National Rate Rate Cap
Savings 0.06 0.81
Checking 0.04 0.79
MMDA 0.09 0.84
6M CD 0.17 0.92
12M CD 0.29 1.04
24M CD 0.44 1.19
36M CD 0.59 1.34
Product National Rate Rate Cap
Savings 0.06 0.81
Checking 0.04 0.79
MMDA 0.08 0.83
6M CD 0.13 0.88
12M CD 0.22 0.97
24M CD 0.36 1.11
36M CD 0.49 1.24
Regulatory Concerns: High Rate Deposits
December 2016 December 2017 July 2019
Fed Funds: .75%
FHLB 1 Year: 1.15%
Brokered CD 1 Year: 1.10%
1.50%
2.05%
1.90%
2.50%
2.02%
2.10%
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Regulatory Concerns: High Rate Deposits
Standard
q FIL-25-2009
q …"a simple average of rates paid by all insured depository institutions and branches for which data are available."
q …presumption that the prevailing rate in all market areas is the FDIC-defined national rate.
q An institution not choosing to use the national rate can define its market area and support its position to the FDIC that prevailing rates in that area exceed the national average.
FDIC National Rate Cap 7/22/19
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High Rate Deposit – National Rate Caps: NMD
u $186MM or 21% of NMDs (on Deposits360°®) above National Rate Caps
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Other Potentially Volatile – Large Balances & Uninsured Deposits
$609MM of deposit balances reside in relationships with over $250k.
• Includes 29 public entities
Approximately $449MM of uninsured deposits if assumed to remove $250k FDIC coverage from each relationship balance.
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Other Potentially Volatile – 2% of Total Deposits
Total Deposits = $1.03B• 2% of deposits = $20.5MM
Relationships Controlling 2% of Deposits = 1
Top 10 = $102MM or 10% of Total Deposits
Top 10 Deposit Relationships
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Large Balance Relationship Analysis: NMDs
Out of the NMD balances that reside in relationships over $250k ($538MM):• 72% of balances have 2 or more accounts per relationship• 56% of balances have been opened for 5 years or more
72%
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Potentially Unstable NMD Large Balances
$99MM (11% of total NMDs) meet all 3 of the following:• Over $250k total deposit balance• Single Deposit Relationship• Less than 5 year relationship
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Example: Concentration Analysis
Single Source Funding Concentration & Potentially Volatile Funding History
12/31/2018 9/30/2018 6/30/2018 3/31/2018
Concentration Thresholds Balance % of Assets Balance % of Assets Balance % of Assets Balance % of Assets
10% of Total Assets 0.0% 0.0% 0.0% 0.0%25% of Total Assets 0.0% 0.0% 0.0% 0.0%2% of Total Deposits 0.0% 0.0% 0.0% 0.0%
Funding Concentrations > 10% of Total Assets
Single Retail / Commercial Deposits 0.0% 0.0% 0.0% 0.0%Public Funds 0.0% 0.0% 0.0% 0.0%Secured Retail Repurchase Agreements 0.0% 0.0% 0.0% 0.0%FHLB & Other Borrowings 0.0% 0.0% 0.0% 0.0%
Other 0.0% 0.0% 0.0% 0.0%Total Funding Sources > 10% of Total Assets 0 0.0% 0 0.0% 0 0.0% 0 0.0%
Potentially Volatile Funding Sources
Brokered Deposits 0.0% 0.0% 0.0% 0.0%NMD with rates over FDIC Nat'l Avg +75bps 0.0% 0.0% 0.0% 0.0%TD with rates over FDIC Nat'l Avg +75bps 0.0% 0.0% 0.0% 0.0%Internet Listing Deposits 0.0% 0.0% 0.0% 0.0%Retail / Commercial Deposits >2% of Deposits 0.0% 0.0% 0.0% 0.0%Uninsured Public Funds (Amount over $250k) 0.0% 0.0% 0.0% 0.0%Uninsured Retail / Commercial Deposits 0.0% 0.0% 0.0% 0.0%Secured Retail Repurchase Agreements 0.0% 0.0% 0.0% 0.0%
FHLB & Other Borrowings 0.0% 0.0% 0.0% 0.0%Total Potentially Volatile Funding Sources 0 0.0% 0 0.0% 0 0.0% 0 0.0%
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Example: Concentration Analysis
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PVL Analysis – Now What?
How does the more “at-risk” level of your analysis compare to:
• Liquidity Contingency Deposit Run-Off• On Balance Sheet Liquidity• Total Basic Surplus operating contingency reserves
Think of PVL assessment like building a Loan Loss Reserve analysis for Large or At Risk Deposits
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Revitalize Your Risk Monitor
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Key Elements of Liquidity Risk Monitoring
Key warning signals or risk indicators (“triggers”)
Should be institution specific and meaningful
Match to operating activities and philosophies
Management should take into consideration both local, regional, and national market elements
Be commensurate with complexity of balance sheet/risk profile
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Liquidity Risk Monitor: Qualitative Indicators
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Revisit Your Risk Monitor
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Management Response
Potential volatile liabilities have increased to 29% and have triggered Risk Level 1.
Management has applied a low stress level response as the total liquidity position (on-balance sheet as well as access to wholesale funding) remains strong. Additionally, the high concentration of volatile deposits have been analyzed and defended based on the strong core relationship with the customers.
Management will closely monitor changes to liquidity levels moving forward.
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Develop a Dynamic Forecast & Stress-Test Framework
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•Collateral values•Deposit Runoff, and/or Loan Losses •Below well-capitalized (low probability/high risk)
• Loan growth > deposit growth•Higher wholesale levels• Lower bond values
Economic
•Funding concentrations (PVLs)• ICS/CDARs• Loan concentrations
Rising Rates
• Industry specific•Environmental threats
Bank-Specific
Regional
Liquidity Stress Testing
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Observations from Crisis – Stability of Funding Sources
On Balance Sheet
• Bond liquidity and selling at wrong time w/ losses a big deal
•Need multiple outlets for accessing cash w/ collateral
•Haircuts will increase in times of need
FHLB
• Largely stood by members in need
• Lines trimmed/haircuts on collateral/term restrictions
•Delivery of collateral
Brokered
• IDC rating scale of 1-300 seemed to affect pricing
• If a “1” and well capitalized, window was open
CDARS
• IDC data feeds internal risk assessment model
• Reciprocal deposit business not immediately pulled from participants
• Issue is brokered deposit restriction/waiver process
National/Internet CDs
• Kept banks afloat long after brokered was pulled by regulators
• Issue is brokered restriction on rate, and high rate market
Considerations in Building in Your Liquidity Stress
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Dynamic Liquidity Forecast
Source: Liquidity360°®
$40MM loan growth$34MM deposit growth
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Liquidity Stress Testing & Key Components
Deposit runoff (from study)Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure?
Moderate Stress Scenario
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Liquidity Stress Testing & Key ComponentsSevere Stress Scenario
Severe Stress Scenario Remediation Plan
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Five Steps to an Effective Contingency Funding Plan “CFP”
Risk Monitoring
System
Formulate “The Plan”
Develop a 1-2 Year Cash
Flow ForecastStress Test
Remediation Plan
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Deposit Strategies to Improve Liquidity
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Lending & Deposit Observations(Some Variations By Market)
Lending: Flat to Inverted Yield Curve & Lower Term Rates
• Loan pricing under downward pressure for many (Before 25-50bp)• Elevated “non-rate” based competition: terms & conditions• More banks “walking away from deals”• Loan growth outlook dampened for most• Longer term assets to help reduce Asset Sensitivity (Declining Rates)
Deposits: Higher Short Rates & Accelerating Pricing Pressures
• Slowing growth rates & increased disintermediation• More negotiations…and at higher interest rates• Increased incidence of “Specials” (CDs & MMDA)
• BUT, KEY ISSUE: “What will happen if the FRB begins to cut?”
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Three Critical Questions
1. How Much Liquidity Do We Have?
2. How Much Liquidity Do We Need?
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Three Critical Questions
1. How Much Liquidity Do We Have?
2. How Much Liquidity Do We Need?
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90-Day Liquidity Forecast
How do we fund loan growth?
u Raise deposit rates?u New product/market initiative?u Use Investment cashflow?u Draw down on wholesale?
Net Loan Growth $10MM
Net Deposit Flows $0MM
Net Cash Flow $-10MM
Cash/Investment Cash Flow Due $5MM
Wholesale Funding Maturities $5MM
Net Loan Growth $0MM
Net Deposit Flows $0MM
Net Cash Flow $0MM
Cash/Investment Cash Flow Due $10MM
Wholesale Funding Maturities $5MM
How do handle the investment cashflow?
u Re-invest at current rates?u Payoff wholesale maturities?u If not, how long to renew wholesaleu What about Deposit pricing pressures?
v One-off’s, let leave, price up
Defensive Deposit Strategy Offensive Deposit Strategy?
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Three Critical Questions
1. How Much Liquidity Do We Have?
3. How Much Do We Want to Pay?
2. How Much Liquidity Do We Need?
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Industry Rate Trends (Interest-Bearing Deposits)
Even If Fed Is Done Raising Rates, Will Deposit Pricing Pressure Continue Through 2019?
?
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Deposit Strategy Discussions
Offensive or Defensive strategy?
Discuss potential hurdles• Explore all options• Discuss new money initiatives and how to roll out• Minimum balance• Relationship-based pricing
Marketing efforts more focused in specific markets
Front line sales training
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Deposit Initiatives: Understanding Your Customers
1. Banking model for top 100 / 200 customers…..2. Identify “at-risk” customers3. Identify opportunities within…direct marketing programs 4. Track new money vs. cannibalization5. High Share vs. Low Share6. Specials Rates vs. Rack Rates7. Single Relationships 8. Revisit MMDA tier structure9. Tracking of Closed/Lower Balance 10. Branch structure/“E” Banks 11. Are we asking? 20
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Cost of Interest Bearing Deposits
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Understanding the Cost of Cannibalization
Source: Deposits360°®
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Understanding the Cost of Cannibalization
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Understanding the Cost of Cannibalization
Source: Deposits360°®
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Identify Single Source Customers
Source: Deposits360°®
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Relationship – Declining Balances
Source: Deposits360°®
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Key Takeaways
1. Identify Your Liquid Asset Cushion
2. Do Your Homework on PVL Concentrations
3. Revitalize Your Risk Monitor
4. Develop a Dynamic Forecast & Stress Test Framework
5. Deposit Strategies to Improve Liquidity
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Can You “Tell” Your Story?
Can you explain your actions • What are you doing?• Why?• How?
Discussions / Committee(s) / Documentation
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