Why Your Bank Should Consider Liquidity Diversification

By Thomas Underkofler, SVP/Chief Investment Officer for Bankers’ Bank

Fourth quarter 2023 continues down the path of higher interest rates. For many bank investment portfolios, this translates to continued disinterest in recognizing losses on securities sales. Deposit competition has put pressure on margins as banks try to hold on to existing customers and attract new balances. As your bank positions its balance sheet for current and future needs, consider continued liquidity diversification as a goal in your team’s planning.

Investment Portfolio Sales September’s fixed income market sell-off continued the dilemma of when to liquidate underperforming securities at a loss to redeploy into higher yielding assets.  Most banks continue to exhibit underwater securities and will have to be selective on where they can minimize loss or restructure parts of the balance sheet.

Investment Portfolio Pledging While your bank may have limited appetite for investment portfolio loss sales, the portfolio may continue to be utilized for funding pledge collateral. Examples of this pledging include municipal deposits, FHLB advances, and the Federal Reserve Bank. Pledged assets monitoring should include value of amounts currently pledged relative to amount security required. Contact the Bankers’ Bank team on efficient management of your collateral needs.

Federal Funds Borrowings Bankers’ Bank Payments and Cash Management customers can secure federal funds borrowings in addition to an approved unsecure line.

Brokered Deposits The benefits to these sourced deposits include: attract deposits with terms not generated internally, limiting the shift of existing customer deposit accounts into higher alternatives, and source deposits from outside market area. Some brokered options may include call features that the bank could eventually exercise for future funding flexibility.

Reciprocal Deposits Attract and retain higher balance deposits through an insured option to customers. These deposits provide opportunities to increase insured balances and core funding.

Deposit Products Innovation Updating and marketing your deposit products with features that differentiate your bank can keep those relationships coming to you. Examples include term specials, higher balance options, and treasury management services.

As your team updates its liquidity plan, there are multiple opportunities to diversify sources. For ideas and resources to help your bank, please contact a Bankers’ Bank team member.