PCBB
BID Daily Newsletter
March 18, 2008

BID Daily Newsletter

March 18, 2008

DEPOSIT TRICK #114

Here is a nifty little tactic that we learned from an astute banker in New Mexico. Let's say you are in a deposit market with banks that are paying a high rate for deposits. You issue brokered CDs (from us) and then you contact those high-paying banks and make a big deal about purchasing their CDs. Once you get on the phone, you say things like: "4.00%, is that a typo?," or "How can you afford to pay that?," or our favorite, "Heck yes, we will take it, our board members are so conservative, that they will never let us have any fun and give away value like that."
Whatever you say, the object is to make a big show of it, so it gets back to that bank's management. If the bank accepts your money, you borrow at 3.00% in the brokered market and then invest in the promotional bank at 4.00%, getting an arbitrage and interest rate free 100bp. Better yet, you increase the interest rate sensitivity of your competition by that 100bp - sapping valuable earnings from them.
On the other hand, maybe the promotional bank gets cold feet and decides to reconsider selling you a CD. In this case, they may get the message and drop their rates. If so, your mission is accomplished and you can congratulate yourself for being a leader in your marketplace. Do it a couple of more times to other banks in your area and pretty soon you have single-handedly brought your whole market in-line. Soon, your investment willingness will act as a signal to the market and deposit rates will trend lower for the benefit of all. Since there are no formal arrangements and no one has a dominate market share, no antitrust or price collusion rules are violated. If used effectively, a bank can bring down rates in the area by 30bp to 60bp.
One of the largest detractors from profitability is high rates on in-market CDs. As the Fed keeps dropping rates, banks that keep rates high hurt themselves more at a critical time. The lower rates go, the more sensitive bank earnings are to small changes in rates because of margin compression. That is, the same rate changes make up a larger percentage of profit. This is why it is critical to maintain margins as much as possible in today's low and falling rate environment.
A recent focus group we conducted drove home the point that customers are more sensitive to loan rates and fees than to deposit rates. As such, most of the pressure on deposits either comes from a combination of going after the wrong customer type and convincing ourselves that customers are more rate sensitive than they are.
Gas stations have been signaling their pricing for years on the corner with profitable results. By helping teach other banks in your area, the sanctity of deposit discipline, the industry will be made better off.