Restoring liquidity requires long-term solutions

Northwestern Financial Review, Jul 15, 2001 by Mengedoth, Don

[management]

ABA Focuses On Liquidity

"For every complex problem," the journalist H.L. Mencken said, "there is a solution that is simple, neat and wrong." The funding and liquidity problem facing our industry is that kind of problem, and no one-size-fits-all solution will work.

The symptoms are well understood by just about everyone. Loan growth at many depository institutions - especially community banks - has gradually edged out deposit growth. The trend can be traced back a decade or more. The American Bankers Association found in a recent survey of bankers that nearly eight-in-10 banks face some aspect of this problem. They tell us that deposits are just harder to come by. We're not at a crisis stage but to ignore the trend would be a mistake.

ABA's 2000 Farm Credit Survey Report found the problem especially acute for rural banks. While many urban banks struggle to attract deposits, and are successful only at rates that squeeze earnings, many rural banks simply can't find the money at all. It has left the community. Of the rural banks that responded to our survey, 57 percent said their deposits did not grow fast enough to meet loan demand, and that was up from 33 percent a year earlier.

It's not just a matter of identifying new funding sources, although that is certainly an important part of the solution. Our industry's trade associations must help bankers understand the unique characteristics of each of the various funding vehicles that are available, from Federal Home Loan Bank advances and loan participations to asset securitizations, repurchase agreements and more. As Federal Reserve Chairman Alan Greenspan cautioned in a March speech, "the growing volume, variety and complexity of non-deposit funds creates new issues. To meet this challenge, community banks must strive to fully comprebend the implication of relying on these types of funds from both liquidity and earnings perspectives."

When I formed ABA's funding and liquidity steering group late last year, my purpose was to focus greater banker attention on this issue. The steering group is trying to develop long-term resources to help bankers manage their funding challenges more efficiently. For example, we've partnered with Alex Sheshunoff Management Services, Inc., to develop a set of tools and resources to help bankers attack this problem head-on in their markets. I expect that the new ABA toolbox will be available for our members later this summer.

A place also exists for certain legislative solutions, especially those that provide tax-related incentives. Community bankers could benefit from such legislative enhancements as the creation of FFARRM accounts, strengthened "Aggie" bonds and expanded Subchapter S opportunities.

I was glad to see that Senators Wayne Allard (R-Colo.), Craig Thomas (R-Wyo.), and Tim Johnson (D-S.D.) recently introduced a bill to expand Subchapter S availability for small businesses and community banks. About 1,500 FDIC-insured institutions - approximately 15 percent of the banking industry - have elected subchapter S status since 1997. Most are community banks, and most will benefit from passage of this legislation. ABA is behind the bills 100 percent.

It's also important that we work closely with the federal regulators, and that is another strategy ABA is pursuing. We want the regulators to understand the banker's perspective, and we hope to enlist their support for greater supervisory consistency. It doesn't help any of us if regulators in Washington say Federal Home Loan Bank advances are good, for example, while bank examiners in the field take an opposite view.

But nothing will happen overnight. Alan Greenspan said: "Many of these liquidity pressures are likely to remain in one form or another." Chairman Greenspan is right but I'm convinced there are steps our industry can take to begin to turn the problem around. This is a top priority for ABA, and if your bank is experiencing some of these funding problems, I hope it's the focus of your attention as well.