Finding Funds at a Reasonable Price

There`s little argument among bankers today that funding the bank is getting increasingly difficult. A recent FDIC report showed a 20% decrease in the use of core deposits to fund banks over the last five years. (In the 1990s loan growth was 7.3%, core deposits, only 3.8%.) A study of community bank customers who have large deposits shows their average age to be over 65. So deposits are a declining source of funding, and the average age of those customers who do stay with the bank is heading up. Why is funding tougher now? For one, we haven`t had a recession or depression for more than 10 years, so people are less impressed with the government`s guarantee on deposits. Also, the great bull market created an environment that resulted in mutual funds that offered higher returns than bank CDs and deposit accounts. It`s hard to compete with a 21% return rate. The fact is, you can get all the funding you want anytimeu00e2u20ac”all you have to do is go on the Internet and tell customers that you`ll provide 1% to 2% over what you are paying now. So the question is not “Can you get deposits?” but rather “Can you get low-cost core deposits?` What we have today is a fierce competition for reasonably priced money. Here are some factors that may help banks battle for the consumer deposit dollar: Banks should stop “accepting” depositsu00e2u20ac”Did anyone ever hear General Motors say it “accepts” orders for cars? The idea is comical. Many banks, therefore, are starting out with the wrong attitude. By not “selling” their customers on the idea of deposits, they are being too passive about garnering new funding. Selling deposits should be as much a part of banks` business as selling loans. A proposed increase in deposit insuranceu00e2u20ac”The FDIC is looking to as much as double its government guarantee. Surprisingly, (though maybe not) the banking organizations are split on the issueu00e2u20ac”ABA says it is fine to index the insured amount, but it will only support the proposal if it is part of an overall banking package. America`s Community Bankers is against it until the costs are fully understood (though it shouldn`t cost anything). The Independent Community Bankers of America supports the proposal because it helps smaller banks. As usual, though, unless all the organizations get together and support the proposal, nothing will happen. Opportunities on the Internetu00e2u20ac”Any insured bank can go on the Internet and is likely to raise depositsu00e2u20ac”it`s actually quite easy to do. Remember, though, customers gained in this way are not placing their savings with you because they are loyal to your organization or because you are an outstanding bankeru00e2u20ac”they are placing it with you because it is the highest rate they can get with a government guarantee. So the money is there. It just depends on whether you want to go after it. You can get it on the Internet, but be ready to pay the price. Look to the investment banking communityu00e2u20ac”Today, you can go to Merrill Lynch and say, “I want to leave some money with you and I want it to be safe, so put it in U.S. government bonds.” The first thing they`ll say is “Why don`t you put it in a bank?” A lot of money is coming into the banking system through Merrill Lynch. In general, they, and other investment bankers, have made arrangements with banks to provide funding. And from what I have seen, it is a lot less costly than trying to pay for it through the Internet. The Home Loan Bank Systemu00e2u20ac”This has become anything but the Home Loan Bank Systemu00e2u20ac”it`s become another government-sponsored enterprise supporting the funding of the banking system, even larger institutions. Washington Mutual, largely a mortgage lender, for example, borrowed almost $65 billion in 2000, which has allowed it to become one of the biggest banks in the country. Three-fourths of the banks belong to the Home Loan Bank Systemu00e2u20ac”more banks now than thrifts. It`s essentially become another Fannie Mae or Freddie Mac. Furthermore, it`s just announced a program to broaden the asset categories it is allowed to use as collateral for lending. The best thing that could happen to help banks with funding would be to have an even bigger stock market crash. Of course, that would have some other dire repercussions. But in the stock market crash of 1987, bank funding did increase dramatically. Short of an actual crash, if we have a bear market, then it will still be goodu00e2u20ac”maybe not for business lending, but it will encourage savings. In fact, the recent sharp stock market decline has resulted in a substantial increase in deposits in the first quarter of 2001. This is not a problem that will go away. But the government must stop borrowing because of the federal budget surplus. Once the government debt is paid down, interest rates should be lower because there will be less demand for money. The insured banks` deposits will become the biggest source of government debt obligation, replacing government bonds. So, you can hope Alan Greenspan is right and the debt is paid and the market doesn`t crash. Or, you can hope the market crashes and deposits will flow into banks that way. Either way, banks get the money. The trouble is, there`s a space between now and when either of those things are likely to take place. Figuring out how to bridge this time gap should be bankers` top concern.