As economies enter a refreshing phase of relative normality, banks are consolidating their stability strategies, focusing on deposits as an ever-growing proportion of overall funding. However, while this sensible approach is admirable in many ways, it is not, like any banking strategy, without risk. We must learn to acknowledge the inherently deceptive nature of financial stability.
The most prominent sign of stability has been the ongoing commitment from three major monetary policy makers - the US Federal Reserve, the Bank of England and the European Central Bank - to lower base rates. Market crashes in China, plummeting oil prices and the migrant crisis in Europe have all weighed heavily on these decisions. Yet these factors go against the general tide of economic growth and there are few analysts who believe that a rate rise is anything but ‘a question of when, not if’.
These comments are part of my latest paper, which identifies main concerns for banks moving into 2016: interest rate changes, savings regulatory environment, liquidity requirements and Basel III, and funding for lending scheme.
The Financial Conduct Authority’s new Cash Savings Regulations are expected to come into effect in Q1 2016. The new regulations are there to improve efficiencies, transparency and consumer outcomes. These regulations will alter the way banks communicate and manage rates in the market in attempt to increase transparency and counteract to some degree the affect of inertia. While the new regulations will result in some operational pains for banks as they alter current processes or design, the need for banks to understand their portfolios, customers and key behaviours has never been so acute. Without this understanding, the impact of new measures on balance sheet funding could be substantial.
Liquidity requirements and Basel III are fundamental contributors to a balance sheet strategy and the composition of deposits within the funding strategy of a bank. Banks must hold a buffer of ‘high quality’ liquid assets to cover net liquidity outflows in a 30-day period of stress and sustain a minimum amount of stable funding in order to support lending activities.
Most banks are well on the way to achieving compliance targets, however this is not a ‘one and done strategy’. The composition of books is likely to change and more deposits have flowed to liquid demand accounts than would have been traditional.
A new approach is required to develop a robust deposits strategy to keep a healthy deposits bottom line, which will generate:
A greater understanding of consumer behaviours and preferences (e.g. convenience over return)
A clear understanding the impact of rate changes on volume movements and margin
A deeper understanding of saver actions in the context of the bank’s competitor actions
To do this, banks must be prepared to address the looming retention challenge, born of shifting rates and new ‘switching’ regulations. The strategy must be led by a deep set, data-driven analyses of customer attributes, sensitivities and actions. Here, like in all other areas of modern commerce, banking must be transformed from more art into more science. This is how we will find the most economical path to a sustainable and profitable future in the banking industry.
Damian is a career banker with more than 25 years of experience. He spent most of his career with Bank of Ireland where he held a number of senior roles, including Head of Deposits and Current Accounts, Head of SME Banking and Head of Customer Management and Customer Analytics. At Nomis, Damian is Managing Director responsible for the APAC region.