Pub. 7 2019 Issue 2

Issue 2. 2019 11 Matt Harris, CFA, is Senior Vice President at The Baker Group. He started with the firm in 2007 as an intern while attending the University of Texas-Austin, where he earned a Bachelor of Arts degree in government and economics. In 2010, he joined the firm’s Financial Strategies Group at the home office in Oklahoma City, where he works directly with bank- ers, examiners, and auditors regarding fixed income portfolio analysis and asset/liability management. Harris is also involved in the development and testing of Baker ’s proprietary bond accounting and interest rate risk software. Contact: 405-415-7251, mharris@ GoBaker.com. The review and analysis of deposit rates and their projected betas is never a one-size-fits-all approach. Variables such as geography and market com- petition heavily weigh on the sensitivity of these rates. New York and the Southeast region tend to have the highest deposit betas while areas in the Mid- west have the lowest. In more competitive markets, we’re be- ginning to see certain products being tied to short-term interest rates (for example 50 percent of prime rate). By tying your non-maturity deposit rates to short-term rates, you remove flexibility to manage these rates, which can be challenging in a rising rate environment. Another factor is institution size; community banks have been slower than regional and big banks, but will likely have to play catch up if they lagged over the last three years. One interesting trend we are seeing is banks spending more time improving and incentiv- izing their deposit operations department. While it’s long been the norm to establish pro- grams like this in the lending area, these individuals at the bank are vital in providing low-cost funding, which can then be deployed in earning assets such as loans or secu- rities. ALCOs are rolling out new customer loyalty pro- grams and improving customer relationship building training with office administrators and controllers at their commercial accounts. Below are some oth- er useful ideas to help manage your betas. Ideas to Lower Your Deposit Betas Limit rate advertisements, focus on quality of service and products offered. • Tier certain deposit prod- ucts and manage their rate changes separately, creat- ing some low beta products (most often with lower balance tiers). • Focus on certain demographics that ex- hibit low deposit beta behavior. • Increase duration of client relationships through training/education/incentives. • Cross-selling strategies and customer loyalty programs. If your bank experienced higher betas earlier in the cycle, how much will it take for compe- tition to catch up? If your bank is smaller than market competition, will it lose market share? If loan demand is picking up, how long can the bank support these growth levels with these higher funding costs? As you and your bank think about these questions, remember that there are many reasons, other than interest rate, why customers choose to deposit their funds at the bank. Studies have determined that consumers place higher value on attri- butes like convenience, service, availability, and technology over deposit rate pricing. Also keep in mind that assumptions, by definition, have limitations since they can vary from what actually occurs in reality. That’s why as prudent risk managers we should always periodically stress test our assumptions with worst-case scenarios. If your bank hasn’t been talking about implementing these concepts, now is definitely the time to do so! Taking time to revisit these interest rate risk concepts, making adjustments to your ALM model, and stress testing are all the right ingredients to a successful exam visit from your regulators. n