Liquidity situation forces new look at A/L management

Northwestern Financial Review, Mar 15, 2001 by Bengtson, Tom

The liquidity crunch is forcing bankers to reconsider how they manage their assets and liabilities. That was the consensus of experts who addressed funding challenges during a panel discussion at the Minnesota Bankers Association's executive seminar Feb. 14 at the St. Paul Hotel.

"The changes in bank asset/liability management are as big as they were with the elimination of Reg Q," said William Rosacker, president of United Bankers' Bank, Bloomington, Minn. Rosacker was one of four people to discuss the vexing aspects of the funding question. He was joined by Pat Conway, president of the Federal Home Loan Bank of Des Moines; Kevin Murphy, Minnesota deputy commissioner of commerce; and Larry Schmidt of the FDIC's office in Mankato, Minn.

"Asset funding is evolving," Rosacker said. "We do not have a crisis, although we do have a challenge. The truth is there are more funding options today than there ever have been. Certainly, however, our dependence on core deposits as a source of funding is declining."

Although asset growth is outpacing deposit growth, banks remain profitable. Minnesota banks continue to enjoy healthy returns on assets and equity, although Rosacker pointed out those ratios are lower than they were five years ago. The cost of funding is rising, Rosacker noted, as banking loses one of its traditional functions - funds storage. Margins on the other classic bank services - the transfer and lending of funds - are shrinking, he said.

In the post-Reg Q environment, Rosacker noted many banks have moved rates lower to achieve greater margins. In the process, however, they have created substantial retention risk. Consumers, he noted, have many more options for saving their money than they had years ago. In addition, he said, consumers are increasingly rate savvy.

Rosacker said banks do a poor job competing with other providers of financial services. He noted an informal survey conducted by United Bankers' Bank in which 21 banks and four brokerage firms were contacted. Each was informed that the caller had $1,000 they wanted to invest in a short-term savings vehicle. The interest rates offered by the banks ranged from 1.25 percent to 3.22 percent; the rates offered by the brokerage firms ranged from 5.5 percent to 6.3 percent.

Schmidt concurred that banks are not paying sufficient rates to attract most consumers. He noted that in 1985, banks held 60 percent of all money in individual retirement accounts. Today, the figure is around 10 percent.

Banks are relying more than ever on Federal Home Loan Bank advances to fund loans, all the panelists said. Schmidt said that six years ago 1,785 banks in the country used Home Loan Bank advances; today the figure is nearly 4,000 banks. As of late September, Schmidt said 48 percent of the banks in Southern Minnesota were using Home Loan Bank advances. Most banks are using the advances in moderation. "Very few banks are using the Home Loan Bank advances too much," Schmidt said. "There are three banks in the region that are using advances that equal 20 percent of their assets. The rest are well under that percentage."

Schmidt affirmed that the "FDIC does not discourage Federal Home Loan Bank borrowing."

Schmidt said the FDIC is much more interested in the reason for the Home Loan Bank advances. "Is the money replacing lost sources of funding, or is it funding growth?" Schmidt asked. "Growth is fine as long as they are good quality loans."

Schmidt noted the biggest concern regulators have is the stability of Home Loan Bank funding. Will it be available if the economy turns sour? "The Federal Home Loan Bank assures us this money will be there in tough times, but you still have to have the collateral," Schmidt reported.

Murphy also expressed concern about the availability of Home Loan Bank funding during difficult economic times. "When a bank's capital drops to critical levels, it's very hard to get money out of the Federal Reserve, even if they have the collateral," he commented. "We'll see how it goes with the Federal Home Loan Bank on the downside of the economy."

Conway admitted the relationship between commercial banks and the Home Loan Bank system is in the "honeymoon" stage. "The banks and their regulators have not seen our reactions during an economic slowdown," he said. He assured bankers the Home Loan Bank of Des Moines would stick with banks regardless of the economic environment.

In an interview after the panel presentation, Conway pointed out specific differences between the Federal Reserve Banks and the Home Loan Bank system, which explain why the Home Loan Banks are more likely to lend money to a troubled bank than the Federal Reserve. "The Fed is a branch system. They all have to talk to Washington," Conway said."We are 12 separate entities. We can each make our own judgments about lending. As long as we can make loans that are safe and sound, we will."

Conway also said the law that created the Home Loan Bank charter specifies they can lend to capital-deficient institutions. Conway noted the Home Loan Bank continued to lend to the Hartford-Carlisle Savings Bank of Carlisle, Iowa, throughout the months preceding its January 2000 closing.