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How real is your deposit growth?

All that glitters is not core

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High deposit levels now are no guarantee of future depositor performance, especially at today's extremely low rates, says ALCO consultant. High deposit levels now are no guarantee of future depositor performance, especially at today's extremely low rates, says ALCO consultant.

By Keri Crooks, Darling Consulting Group

Today's environment continues to present many challenges to the banking industry, including accelerated margin pressures, limited loan growth, and excess liquidity.

Additionally, most banks continue to be mystified by the continual growth experienced in their deposit base, which only accentuates the frustrations associated with low or no loan growth and unattractive investment alternatives.

Many banks have actually taken actions to deter "unwanted" deposit growth.

As noted in the FDIC's final 2012 Quarterly Banking Profile, deposit growth has set a new record, as total deposits increased by 3% over the previous quarter and in excess of 6% over the year. Two-thirds of the banks experienced an increase in deposits, and domestic deposits now fund over 65% of industry assets (the largest share since 1994). Clearly, deposit growth trends have continued throughout the majority of the banking industry even at today's near zero interest rates.

But are these deposit levels sustainable?

Probably not, and here's why you should worry: The longer we remain in this low-rate, slow-growth, and wild-card environment, the greater the chance for the build-up of temporary and/or rate-sensitive deposits that will produce elevated interest rate risk and liquidity-depleting pressures in the next economic growth cycle.

Regulators take notice 

It is no surprise that the regulatory agencies have taken notice of these unusual deposit growth trends and responded with additional requirements for managing the corresponding inherent risks, especially as relates to non-maturity deposits.

This has resulted in examiners delving deep into risk management models in order to assess their adequacy. In this regard, we have observed an elevated focus on examining the reasonableness and substantiation of bank-specific deposit behavior assumptions. This includes the appropriateness of stress testing sensitivity assumptions for both liquidity and interest-rate-risk modeling activities.

Aside from the regulatory focus, the reality for banks that have already implemented reasonable stress-testing practices is that most admit that they often struggle with gauging how aggressive or conservative their deposit sensitivity assumptions truly are; especially if they have experienced abnormal non-maturity deposit growth and/or mix changes during this cycle.

So, what's the message? Regulators clearly understand that assumptions regarding deposit pricing and potential deposit balance volatility can greatly impact the results of earnings simulations, economic value of equity calculations, and liquidity levels. Accordingly, banks will need to demonstrate--and be required to do so--that they have meaningfully addressed the inherent uncertainties associated with the abnormal deposit growth rates that have occurred throughout the industry.

Specifically, most banks will be required to prepare a more in-depth analysis of their bank-specific deposit behavior.

Coming up with a game plan

At a minimum, banks should consider the following in order to improve and more meaningfully document an understanding of their deposit base:

1. Level of analysis required: The level and depth of your bank's deposit analysis can range from a brief document highlighting the changes in balance, rate, and mix over various timeframes to a detailed deposit study conducted by a third-party provider.

The analysis, at a minimum, must provide you with useful information based on historical points of reference that you can utilize to validate the key assumptions for interest-rate-risk modeling--in particular, rising rate pricing adjustments for your deposit base.

It should also provide a frame of reference for gauging the potential degree of "parked balances" that might be vulnerable to disintermediation or shifting into other more rate-sensitive products as the economy improves and interest rate levels rise.  These factors would affect interest rate and liquidity risks.

The depth of  the bank's analysis should depend on the materiality of your non-maturity deposit base as a funding source, the build-up/trends experienced over this cycle, and the nature of your overall balance sheet risk and financial positions.

2. Data and documentation: A meaningful time horizon of deposit data is important regardless of the level/sophistication of analysis performed.

The horizon selected should include a range of interest rate cycles. Documentation should include an assessment of the findings relative to the key assumptions utilized in your interest rate risk models. You must keep in mind that the math should only be a starting point!

There are numerous events that can influence the math. They could even support assumptions differing from what your historical analysis depicts. Such factors can include new branch openings, a bank failure in your market, acquisitions, new product promotions, etc. These items should be taken into consideration when developing meaningful assumptions.

3. Education: An understanding of the deposit analysis and model implementation is absolutely critical.

Imagine having a deposit study in hand, but not being able to articulate what it means when an examiner asks you. This can be a particular challenge given that many of the "traditional" deposit studies available to banks read like a statistics thesis paper.

Ensure that your bank's ALCO and the executive team understand the results of the analysis, and how the results should be incorporated into your bank's risk measurement and management activities. Make sure that what you do is easily digestible!  

While some banks may be able to justify a more general, high-level  approach, most seeking to be in line with best practices will likely need to engage in some degree of "heavy lifting" that will vary with the  scope of the analyses performed and the extent to which the analyses are handled in-house or outsourced.

Recognize that doing nothing should not be an option in this environment--from both a regulatory, balance sheet risk management perspective and from a strategic perspective.

Motivation for a deposit study

A deposit study should help bring a picture of your deposit base to life. It should be more than just a report that sits in a drawer or that is handed to a regulator. Look for incorporation of qualitative data, guidance on model implementation, executive summaries, education, and strategic value. This last item is often overlooked and undervalued.

For example, having support for and a strong comfort level with the characteristics of your non-maturity deposit base can be instrumental in determining the appropriateness of fixed-rate lending strategies, which continue to characterize today's lending environment. It can also reveal hedging opportunities, expedite development of deposit promotions, and alter wholesale funding or investment strategies.

We believe that, at the very least, banks have an opportunity to turn a growing regulatory "requirement" into an analysis that can be leveraged to not only enhance earnings, but improve liquidity forecasts, capital plans, stress-testing activities, and overall strategy development.

Increased knowledge can lead to better decision-making.

About the author

Keri Crooks joined Darling Consulting Group in 2002. She presently consults directly with ALCO groups and boards of directors at banks in the area of asset liability management with the goal of enhancing high performing institutions. She takes a hands-on approach at developing strategies to best fit the risk profile for each bank's balance sheet, while also balancing trends and pressures alive in the current industry.

Additionally, Crooks remains actively involved in advancing Liquidity360°, DCG's proprietary liquidity risk management software. She frequently writes on balance sheet management topics.


ALCO Beat articles featured exclusively on are written by the asset-liability management experts at Darling Consulting Group. Individual authors' credentials appear with their articles. DCG's consultants have served the banking industry for more than 30 years. You can read more about the firm's history here.

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