Money sitting in liquid accounts such as checking, savings and money markets has ballooned to a record high of $5.9T, according to recent analysis from Market Rates Insight. In fact, to stay safe and flexible, people in the country that have dumped so much money into these liquid accounts have been willing to do so despite earning an average of only 44bp of interest. Until the economy finds firmer footing that people believe will lead to a robust and self-sustaining economic recovery, bankers can probably expect most of the cash sloshing around in these short-duration accounts to stick around.
As you consider reducing your funding cost even further to help maintain margins, we thought we would broaden the discussion to cover some of the other initiatives going on around the industry for the rest of the year. In doing so, we consider a bevy of surveys and research reports on banking industry trends.
One study, by Deloitte, takes a relatively deep dive into the trends shaping the industry and surfaces some good information for discussion at your next management meeting. Massive changes are afoot, forcing bankers everywhere to refocus and challenge the underpinnings of the basic business model. As management teams try to generate more revenue, they are also faced with challenges about how to better manage data, allocate capital, improve technology and reassess strategic priorities. Difficulties remain, banks are under strain and financial regulatory reform (under Dodd Frank and Basel III) is reshaping the industry in ways yet to be defined.
Industry changes have redefined how we use our capital and the sources and uses of our liquidity. Strategic realignment has become a reality and banks are evaluating which business lines to consolidate, which ones to exit and where to expand. Shrinking balance sheets have become common, as banks try to design a stronger organization by reducing the risk profile. On the regulatory front, examiners are seeking more reporting, new information and at an increased frequency. This has all put a corresponding strain on compliance areas at community banks.
As banks have come under pressure, multiple strategies have surfaced that include: expanding into new customer segments; enhancing analysis capabilities; focusing on customer profitability; bundling pricing; cross selling; reducing funding costs; relationship pricing; closing branches; considering M&A; exiting unprofitable business segments or markets; and improving risk management capabilities. None provides the silver bullet that will instantly solve all issues, but by experimenting, your bank may find a handful of solutions that work.
Another survey by McLagan surfaced five key areas that banks (with a median asset size of $750mm) are focused on right now as they refine strategies for the 2nd half of 2011. These include (in order): asset quality; expansion; compensation planning; capital management and a tie for the last slot between improving profitability and customer acquisition/retention.
As we said before, there is no silver bullet that will solve all of the banking industry problems, so hard work will continue to be required in the coming years. The good news is that as can be seen from the analysis, community bankers are busy making progress and remain at the forefront, continuing to push ahead.