alco process - funds management
DESCRIPTION
Rather than shy away from some of the more efficient non-core funding techniques, we believe it wise to make certain your Board and your Examiners understand what is being accomplished through the use of wholesale funding tactics and our third webinar on the ALCO Process is designed to describe an approach to this issue. We will provide guidance on: 1. Where to describe your strategy. 2. Limits to place on non-core funding. 3. Reporting the use of non-core funding. 4. Non-core funding products and services that are in use today. 5. Pros and Cons of these funding sources.TRANSCRIPT
KPN Consulting Webinar Series
Part 3 of 6
Funds Management
Core Vs. Non Core
Though Core Is Normally Less Expensive, We Do Encounter Moments When Non Core Is Cheaper … This is increasing the case when discussing large CD clients.
We Have Been Experiencing That “Moment” For About 18 Months …
Let’s Look At Today’s Environment …
Core Vs. Non Core
One Year CD Rate To Raise $250,000?
Brokered Rate:
FHLB Rate:
CDARS Rate:
Core Vs. Non Core
Does Anyone See a Dilemma?
Should We Raise Funds Most Efficiently (Shareholders Issue) or To Please Regulators?
Of course, your answer may be impacted by your present situation (Consent Order!).
Banks Should Not Use Volatile Sources to Fund Aggressive Growth
FDIC Financial Institution Letter 3-3-09 1 and 2-rated banks will be monitored for growth3,4, and 5-rated banks should have plans to
stabilize or reduce risk exposure and limit growthPlans should not include use of volatile funds or
temporarily expanded FDIC insurance or liability guarantees to fund growth or risky activities
Continuing prudent lending practices not generally considered a risky practice
Funds Management
Regulators Have Become More Positive About Other-Than Core Funding During the Past Ten Years.
That Said, Regulators Are Clearly Alarmed By The Abuse of Non-Core Funding And Its Role In The Present Crisis.
It Makes Sense For Any Institution, That Desires To Fund Outside The Core, To Make Certain It Has Policies and Procedures Describing How Wholesale or Non-Core Funding Will Be Used.
Funds Management
There Are Many Stories Today About Examiners Discouraging The Use of Wholesale Funding and This Discussion Truly Misses The Point ….
Liabilities Do Not Cause Banks To Fail … But Assets Do!
However, There is A Connection To Failed Banks Growing Too Fast and the Use of Brokered Deposits and That is Really The Issue.
Funds Management
So, A Good Way To Avoid That Issue Is To Either Fund Entirely From The Core (Which For Most Means Very Slow Asset Growth), or …
Have A Carefully Defined Non-Core Funding Strategy.
Let’s look At How We Make Certain We Have This Under Control ….
Funds Management
We Should Find Our Strategy Embedded In Three Different Concepts:
ALCO Policy
Contingency Funding Plan
Wholesale Funding Report
The ALCO Policy
Key ALCO Components:
Interest Rate Risk Management
Profit and Spread Management
Capital Management
Liquidity Risk Management
Funds Management
Investment Risk Management
ALCO Policy
Funds Management
The ALCO Policy Should Describe The Various Funding Sources You Will Use.
The Policy Should Also Indicate The Limit You Will Place on the Use of Wholesale Funding Sources – I Would Suggest Using % of Assets.
And, Your Policy Should Indicate Limits For Each Specific Source of Funding - % of Assets.
Remember That The Two Largest Sources of Wholesale Funding for Community Banks Are FHLB Advances and Brokered Deposits.
(in Trillions) 2005 2006 2007 2008 2009 2010
Deposits $7.141 $7.825 $8.546 $9.037 $9.227 $9.422
Mutual Funds $8.906 $10.414 $12.039 $9.601 $11.121 $11.817
Total Wholesale Funding
$2.077 $2.160 $2.464 $2.673 $1.852 $1.773
Total Assets $10.877 $11.860 $13.039 $13.853 $13.134 $13.321
Wholesale Funding /
Total Assets19.1% 18.2% 19.7% 19.3% 14.1% 13.3%
Role of Wholesale Funding12/31/05 – 12/31/10
Bank Thrift Industry Data
Funding Limits
The Limits You Set Should Be Customized To Your Institution.
The Limits Should Relate To The State of The Industry … Over The Past Ten Years % Has Been Around 19%.
The Limits Should Be Ones That You Will Likely Not Ever Achieve.
And These Limits Should Be Approved By Your Board and Discussed With Your Regulators.
Funding Sources
• Many New Forms of Non-Core or Wholesale Funding Have Come On Our Scene in the Past 20 years …
• In Fact, All That These Vendors Are Doing is “Tapping” Sources That We Have Difficulty Accessing and Offering Them To The Banking System.
• If We Could “Tap” Them, We Would!
Wholesale Funding Sources
Funding Without Collateral:
Fed Funds Purchased
Rate Board www.qwickrate.com
Brokered Deposits www.financialnortheastern.com
CDARS www.promnetwork.com
IDC Deposits www.idcdeposits.com
Reich & Tang www.liquidinsureddeposits.com
Wholesale Funding Sources
Funding With Collateral:
Repurchase Agreements
FHLB Advances
Federal Reserve Discount Window
Fed Funds Purchased
“Whiskey & Tickets” Model
Role of Bankers Banks
Today’s Model
Fed Funds Purchased
The Fed Funds model is both a buy (purchased) and sell (sold) model and pricing is not consistent on either side.
This is a price credit sensitive market that may disappear if your institution experiences problems.
Consider having several Fed Funds partners so that you can properly evaluate pricing.
Internet Listed CD’s
Bankrate.com VS. Qwickrate
Some internet sites provide banks to raise CD’s without the use of “Brokered” label…Public sites that provide information only…
Others – Qwickrate and CD Rateline are private sites that provide a more interactive experience and are not considered “Brokered”…
QwickRate eContact Activity by Month
Nationwide Unbiased Rate Information
QwickRate Activity By Term
QwickRate Activity by Position
Deposit Classification
The FDIC classifies a rate board as a “non-brokered deposit listing services” if the rate board meets the following criteria:
Charge subscription fees onlyFees not charged on number or dollar value of CDs placedPerforms no services except gathering and transmission of informationThe listing service is not involved in placing deposit
Deposits obtained directly as a result of a bank listing rates on a rate board will be classified as non-brokered.
“Time deposits less than $100,000” on schedule RC-E of the call reportIncluded in the UBPR calculation of core deposits Does not effect your banks dependency on non-core funding liquidity
ratios
Brokered Deposits
Stigma Still There?
Growth of Marketplace
Why Use Them?
Brokered Deposits
“The FDIC, in its manual of examinations, states that the use of brokered deposits should not be discouraged, and it should not have any stigma
attached to it, provided that the bank uses it in a prudent manner and as part of an overall liability
management program.”
- American Banker
Year End Institutions Deposits
2000 1611 $196 billion
2001 1709 $233 billion
2002 1877 $253 billion
2003 2121 $331 billion
2004 2473 $428 billion
2005 2850 $482 billion
2006 3341 $540 billion
2007 3339 $586 billion
2008 3938 $829 billion
2009 3759 $629 billion
2010 3758 $497 billion
Brokered CDs on the Rise
Brokered Deposits - Facts
• Business Began With “Pass- Through” Approval in 1985.
• For Many Years, This Was A Business Only For Large Issuers.
• In The 1990’s, Regional Brokers Entered the Marketplace And Business Spread To Community
Do They Require Regulatory Approval?
Prior regulatory approval is not required if “Well Capitalized”
Total Risk Based > 10%Tier 1 Risk Based > 6%Tier 1 Leverage > 5%
For “Adequately Capitalized” institutions a waiver from the FDIC must be obtained prior to issuance.
No early withdrawal opportunity other than “death put option”
Suggested Regulatory Guidelines
Include and adhere to the guidelines in your liquidity policy.
Provide an executive summary to your Board of Directors.
Consider the effect of the wholesale borrowing on your asset/liability position.
Contingency planningAlternatives to reduce dependency
Financial Northeastern
If You Want To Check on Rates ….
www.financialnortheastern.comEnter SiteCurrent CD Rates
Likely, Brokered Deposits and FHLB Advances Will Continue To Be Key Community Banking Tools.
Brokered Deposits
Moving From The Wholesale to the Retail Arena:
IDC Deposits – Money Market Solution
CDARS – CD/Money Market Solution
Reich & Tang – Money Market Solution
EXPANDED FDIC INSURANCE COVERAGE & FLOW OF FUNDS
Bottom Line for the Customer: All Funds are 100% InsuredBottom Line for the Customer: All Funds are 100% Insured
Liquidity Provided By: Banks and their customers
MMAX Accounts
Funding the Balance Sheet
Custodian:Wells Fargo
YourBank
Funding Solution
Long Term MMA Funding – 93% of deposits retained on an annual basis
Easy & Reliable – very little back office support and simple documentation
No CIP/AML issues
No Collateralization
Use it when you need it
Current rate – Call For Quote
Requirement – the bank must be “well capitalized” as defined by the FDIC
Funding Solutions That Lead the Way…Promontory offers smart, profit-building services that can
help financial institutions like yours to compete more effectively.
Does your bank want to:
Meet deposit goals? Reduce collateralization costs? Free up pledged securities to fund
loans that earn a higher return? Expand its customer base? Enhance customer loyalty? Lower customer acquisition and
maintenance costs?
Present a consistent face (CD offering) in the marketplace without adding to its balance sheet?
Discourage customers from banking elsewhere during periods of strong liquidity?
Take funds off of its balance sheet without turning good customers away?
Earn fee income? Gain pricing leverage?
Purchase cost-effective wholesale funding without collateralization or stock purchase?
Diversify its funding sources?
The Power of CDARS®
You can also use CDARS as a funding and liquidity management tool to access cost-effective funding, manage your balance sheet, and enhance profitability.
Nearly 3,000 Promontory Network members – financial institutions across the nation – do so already.
With CDARS, you can offer depositors access to $50,000,000 (or more) of FDIC insurance on CD investments.
Build Your Customer Base
CDARS offers investors:
The flexibility to select from a range of maturities.
4 Weeks
13 Weeks
26 Weeks
52 Weeks
104 Weeks (2 Years)
156 Weeks (3 Years)
260 Weeks (5 Years)
How Does CDARS® Work?When a bank places a customer’s
deposit through CDARS, that deposit is divided into amounts under the FDIC insurance maximum* and allocated among other Promontory Network member banks (making the full amount eligible for FDIC insurance). As a result, customers can access coverage from many institutions while working with just one.
*The standard FDIC insurance coverage amount is $250,000 per insured capacity per bank through December 31, 2013. Thereafter, the standard FDIC coverage amount will revert to $100,000 unless Congress further extends the higher coverage amount. Accordingly, for CDs that mature on or before December 31, 2013, customer funds will be allocated to banks that are members of the Promontory Network in amounts up to $250,000, and for CDs that mature after December 31, 2013, customer funds will be allocated in amounts up to $100,000.
CDARS® ReciprocalSM Transactions
Deposits placed through the service are considered brokered deposits under call report instructions. However, unlike traditional brokered deposits, CDARS Reciprocal deposits are not viewed as unusually volatile. Because the reciprocal deposits you place through CDARS come from your local customers (usually within 25 miles of a branch), they tend to behave like core deposits.
CDARS = Rate Board
CDARS Also Has One-Way Buy and Sell Available – This Allows its Members To Take Care of Depositors Without Taking Funds On To The Balance Sheet …
It Also Allows Members To Bid For Funding From Those Who Sell To The Network …
Right Now – One-Way Buy Is Extremely Attractive Funding!
Core Deposit Funding Solution Intrasweep On-Balance-Sheet Sweep
- Attract and retain core deposits- Support local loan demand
Near-Core Funding Solution Demand Deposit Marketplace
- Expanded FDIC protection with 100% daily liquidity- Acquire, send or swap (reciprocal) deposits- Most flexible liquidity management tool available
Non-Core Funding Solution Liquid Insured Deposits
- Low maintenance, high-dollar, low-cost deposits- Stable deposit gathering solution
Reich & TangDeposit and Liquidity SpecialistsSM
Wholesale Funding Solutions
Let’s move to Collateralized Solutions:
Repurchase Agreements
FHLB Advances
Federal Reserve Discount Window
Repurchase Agreement
This is a borrowing that is in effect a secured loan transaction.
The dealer provides you cash in return for your providing high quality securities.
Depending on the length of the borrowing, your securities value will be 105% - 200% of the cash provided.
Given the uncertainty surrounding securities values, this market is not functioning well today for community banks.
Retail Repurchase Agreement
Same concept but your customer becomes the dealer providing you
with cash in exchange for collateralization of deposit.
Federal Home Loan Bank Advances
The Federal Home Loan Bank System
Chartered by Congress in 1932
12 regional FHLBanks, each an independently operated, member-owned cooperative.
Members include banks, thrifts, credit unions, and insurance companies; 8,057 members as of December 31, 2009.
AAA/P-1 credit-rated by Standard & Poor’s and Moody’s
Intended to ensure that financial institutions have access to adequate funds they can use to lend for mortgages.
FHLB Districts
FHLBank System Membership Composition
FHLBank System Members
1990 2010
Savings Banks/
Thrifts2,779 1,083
Commercial Banks 55 5,507
Credit Unions 3 1,030
Insurance Companies
4 227
The FHLBank System: How It Works
Homes CommunityInvestmentMember Institution
InvestorsFHLBanksOffice of Finance
FHLBank System Financial Metrics ($ billions)
12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10
Advances $620 $641 $875 $928 $631 $479
Investments $266 $271 $297 $327 $284 $238
Mortgages $105 $98 $91 $87 $71 $61
Other Assets $6 $6 $8 $15 $30 N/A
Total Assets $997 $1,016 $1,271 $1,349 $1,016 $878
Capital-to-Asset Ratio
4.46% 4.43% 4.20% 3.81% 4.22% 5.00%
Net Income $2.5 $2.6 $2.8 $1.2 $1.9 $2.1
FHLB Borrowing Structure:Three-Part Borrowing Facility
Credit Line:Percent of assets (adjusts with changes in balance sheet)
Collateral:Collateral type (SFR, MF, CRE, Securities, etc.)Collateral arrangement (Blanket, Physical, Custody)Collateral classes are fungible
Stock:Membership stock + activity-based stockClass A or Class B stockMembership requirement = .50% of qualifying mortgage assetsActivity requirement currently = 4.50%
The Federal Reserve System
Key US Programs and ActionsFederal Reserve
Interest on ReservesNew Programs
Primary DealersTerm Securities Lending Facility Primary Dealer Credit Facility
Money Markets, Consumer Credit and HousingAsset-Backed Commercial Paper Money Market Mutual Fund
Liquidity Facility Commercial Paper Funding FacilityMoney Market Investor Funding FacilityTerm Asset-Backed Securities Facility
Bank, Thrift and Credit Union Funding MarketsTerm Primary CreditTerm Auction Facility
Closer Look: Lending to Financial Institutions
Lending programsPrimary Credit
Lend funds (‘no questions asked’) on a short-term basis to institutions in generally sound condition
Secondary CreditLend funds (‘questions asked’) on a short-term basis to institutions that do not qualify for primary credit
Term Auction Facility (“TAF”)Temporary program in which term funds are auctioned to institutions in generally sound condition
Seasonal CreditLend funds to institutions that can demonstrate seasonality in the lending and deposit-taking activities (limited to DI’s <$500MM total deposits)
Securities Loans
Treasury 1-4 Family
Agency Consumer
Municipal Commercial & Industrial
CMO Commercial Real Estate
ABS Construction
CMBS Agriculture
Corporate Bonds Raw Land
Wide Range of Collateral
Discount Window Websitewww.frbdiscountwindow.org
Summary of Credit programs & Collateral Information
Federal Reserve Board Press Releases
Frequently Asked Questions (FAQs)
Acceptable Collateral and Margin Table
List of Reserve Bank contacts & phone numbers
www.federalreserve.gov/monetarypolicy/bst.htmDetailed explanation of Credit & Liquidity Programs &
balance sheet
In Summary
We Will Always Like Core Funding and Will Use It So Long As It Is Efficient and Available.
But, There May Be Moments When Neither of Those Characteristics Are Present.
That’s When We Will Appreciate Understanding All of our Funding Sources!
Thanks!