Publications & Resources

March/April 2009
Focus: Got Capital?

 

Profitable Liquidity. Yes, You Can

By Chris Bledsoe

Most banks believe that liquidity is never profitable and actually costs them money. Nevertheless, it’s something every bank must have, especially in today’s environment. Perhaps it’s time for banks to start looking at liquidity differently – taking advantage of other aspects to lower the cost of funds, fuel future loan growth and build franchise value. 

There’s no question that liquidity is top of mind for most community bankers. In fact, in a recent survey* more than 600 financial managers across the country indicated that it’s currently among their banks’ top three priorities. There are two critical areas where bankers should be focusing the majority of their “liquidity efforts” right now – meeting regulatory requirements and overcoming the future liquidity roadblock.

Managing Liquidity Risk
This first area is “the necessary evil” side of liquidity – the regulatory side. As you know, the credit crisis and bank failures have created a more stringent regulatory climate, and staying on top of evolving mandates and meeting rigorous reporting requirements has become increasingly burdensome. If you haven’t yet, you need to automate all that you can and establish a regular routine for managing, measuring and reporting liquidity from a regulatory perspective.

The key is to continually track and maintain liquidity ratios from several different angles. You must be able to look at the whole picture and know at all times exactly how much in wholesale funds the bank has outstanding and how much can be drawn on each line; knowledge of capacity is a primary area regulators are examining. It’s crucial that you test and understand best and worst case scenarios, and that you have a contingency plan, such as a line at the Federal Reserve, in place. Do you know where the bank stands today? How about next week? Set and be liberal with target ranges. And finally, routinely communicate your standing and trends to your team, board of directors and of course, regulators. This will allow you to turn your attention to an even more important side of liquidity.

Overcoming the Liquidity Roadblock
This second area of focus is how you can increase profitability today and overcome the “liquidity roadblock” of the future – growing core deposits; it will reduce your bank’s cost of funds, increase the bank’s overall value and lead to loan growth. Yes, the competition for deposits is fierce – you may already be impacted by national and larger regional banks’ increasing presence in your local markets. This is why it’s even more important to make this vital area a priority for your bank, from the board to the branch. Here’s how to get started:

Establish a solid plan for deposit growth around an aggressive pursuit of local deposits. Assess where you’re getting the most growth and what product(s) is driving it. Do you have a niche that you can leverage? How does your bank stack up against competitors (in growth, service levels, etc.)? Set realistic goals for growing deposits in today’s market, and involve the branches; hold them accountable to targets, give them tools to track their progress daily, and reward improved performance. Be sure to consistently measure and manage actual bank performance compared to the plan, and adjust accordingly. Lastly, keep this whole process as simple as possible.

Communicate. Ensure you are communicating on all fronts to instill continued trust in your local market. Educate employees about how critical core deposits are to the bank’s future and ensure they understand individual and overall bank goals. It’s also imperative to keep them informed of industry developments and their impact on the bank; they are your front line to the customer and must be able to respond confidently, appropriately and knowledgeably to customer questions. Additionally, it’s a good time to get back out on the speaking circuit as the resident expert on the banking industry.

Provide exceptional service. One thing you can control today is what happens when a customer walks into your bank (i.e. the messages they receive, the information you provide, the environment, etc.) Extraordinary service will go a long way in securing new deposits, and ultimately, future loan growth. Take action to truly differentiate your bank through service.

“Cashing in” on Liquidity
By acting today to automate the regulatory side of liquidity and focusing the bank’s attention on generating core deposit growth, you will help your institution get a leg up on the liquidity crisis. Yes, liquidity is a necessity, but you can put liquidity to work for your bank by leveraging it to increase the bank’s profitability and long-term value. There will never be a better time to get started.

* Banker’s Dashboard surveyed financial managers from a cross section of community banks across the country to determine and measure the areas where they are currently focusing efforts to better manage their banks, and to identify best practices they are deploying in order to meet their improvement objectives. To obtain a copy of the survey report, please visit www.bankersdashboard.com.

Chris Bledsoe is CEO and co-founder of Banker’s Dashboard (www.bankersdashboard.com) in Stockbridge, Ga. He can be reached at 770-507-9894 ext. 101 or Chris.Bledsoe@BankersDashboard.com.

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