United States: Importance Of Understanding Your Deposit Base

With the recent failures of SVB Financial and Signature Bank, it has become increasingly important to have a detailed understanding of the sensitivities surrounding the liquidity position of your bank. The 4.5% increase in interest rates over the past year by the Federal Reserve has led to several notable impacts:

• Higher unrealized losses in the securities portfolio, correlated directly with the duration of the instruments.
• An increase in the overall cost of deposits putting further pressure on margins.
• Elevated potential for increases in deposit runoff and disintermediation.

We expect these developments to heighten regulatory scrutiny in the weeks and months ahead to ensure banks better know their liquidity positions as well as stress-testing these positions. As we have recently seen, increased deposit outflows can quickly put pressure on the securities portfolio and can rapidly convert unrealized losses into realized losses, dramatically impacting the capital position of the bank. To prepare for this enhanced regulatory focus, we recommend a proactive analysis to develop a better insight into your deposit and customer relationships. This analysis should focus on:

• Deposit attrition rates by account balance, product type, industry, and geographic concentration.
• Disintermediation - the movement of funds from lower cost to higher cost deposit products.
• Correlations between deposit runoff and changes in market rates and deposit pricing.

Ankura has assisted clients in performing hundreds of deposit base studies and is well positioned to assist in analyzing your deposit base and comparing the results to comparable institutions. In addition, we are also well versed in ALM (Asset Liability Management) management and can assist you with the independent validation of your ALM model.

This advanced preparation can be valuable in demonstrating to your regulators that you are proactively managing the risk in your balance sheet.