To wake up our readers this morning, we thought you might enjoy the fact that about 17% of people sleep naked! Wow, that is a lot of people slumbering in the buff. Hey, get your mind back in the banking game now, because we have a lot to cover today. While community banking isn't perhaps as fun as sleeping naked, let's get going anyway.
Our discussion today is around liquidity management because it is something that is always on the minds of bankers and especially the bank's ALCO. Proper liquidity management requires a balance that takes planning, discipline and these days, a little outside-of-the-box thinking. The current market situation is unique which makes this more of a challenge than ever.
To start, short term interest rates are low, so things remain a bit weird out there. Many banks have been able to build their portfolios with solid capital investments, so they may not want to take on more. In fact, call reports for community banks have demonstrated that asset duration is now longer - 7 to 10Ys is the norm. Further, it seems that some banks are managing down their liquidity to make way for future opportunities. Given the spread between short term and long term rates is still relatively small, strategies abound and many await higher rates.
One question is whether it makes sense for you to plan your liquidity management around the current low interest rate environment and all that brings, or look to what may happen as rates rise and customer behaviors change, go more conservative given we are 7Ys+ into a recovery.
One way to begin is to look at the regulations on liquidity. Here you find it can make sense to stress test funding and deposits based on all of the above scenarios. Theoretically, you should be in a better position from a financial and regulatory basis than you were pre-crisis, but the regulatory environment is different too. So, whatever you do around liquidity should take this all into account.
If you do feel the need to increase liquidity, this can take different forms. One way is to attract new deposit customers to your bank or go more wholesale in your approach. Both have plusses and minuses and both can and should be stress tested to not only get a handle on rate risk, but also current and future liquidity risks.
The best advice here is to do so "on paper" first, to make sure you figure it all out before making a move. If you find the market is too competitive to appropriately adjust your deposit rates, think about enticing new customers with extra products and services. Just asking your teams to fan out and talk to members of your community can also bear fruit. It could give you an idea of what is most important to these customers, so you can then position your bank accordingly.
Although there is no one-size-fits-all solution for liquidity management, it is never too early to model, test, step and repeat to try to figure it all out. Whether you stay the course or consider modifying your liquidity risk, it is important to assess it regularly given such unique economic times.
That way your bank is better prepared before any liquidity issues surface, instead of being naked and just hoping things work out over time. Sleep tight!