You see the ads every day: people talking about the new hot stock they found or which investment they’re sinking their money into next. Despite uncertainty on Wall Street, consumers are playing the market as never before. But the question remains: where is the money coming from?
According to a recent report, it’s coming from core bank deposits, especially savings accounts. In its Boston Regional Outlook for the fourth quarter, the Federal Deposit Insurance Corp. states that nationwide, core deposits are losing out to equities and mutual funds. The net effect is banks are relying less on those deposits for funding and seeking out alternative sources ranging from the Federal Home Loan Bank to selling shares and assets or obtaining brokered deposits.
Increasingly, banks are relying on a variety of alternatives for a majority of their funding. “During the past five years, the compounded annual rate of core deposit growth for all insured institutions was just 2.8 percent. Assets over this time grew at a 6.6 percent rate,” according to the report.
But while large banks in the New England region are experiencing the decline, small banks in the Bay State – those with under $1 billion in assets – have experienced gains in core deposits. Even those modest gains, however, are not enough to exclude them from the search for alternative funding.
Cameron Tabor, senior financial analyst at the FDIC, said funding sources such as an increase in the number of commercial loans can prove more risky, especially during an economic downturn. “Some of these loans that they’ve been making haven’t been through an economic downturn and, depending on the collateral or what type of borrowers they are, it could be increasing their risk,” he said. However, referencing the real estate crash of the late 1980s, Tabor said, “The industry, as well as the regulatory agencies, learned from the 1980s,” and are keeping a closer watch and being more guarded about risky loans.
Indeed, area bankers who said they have increased their alternative funding sources said they are fiscally conservative.
According to the Massachusetts Bankers Association, since December 1999 deposits have increased by 10.8 percent for small banks in the Bay State. This is due in part to the larger bank mergers, said Daniel J. Forte, president of the MBA. “If you go back 10, 15, 20 years, core deposits have been eroded because of the inroads that non-banks have made into the banking business, the mutual funds … and that’s why the financial modernization bill [the federal Gramm-Leach-Bliley Act], in the long run, is key to all banks. We need the ability to get in [to new markets]. The non-banks have been in the profitable aspects of the banking business for a long time now; the key is to allow us to get into the various aspects of other financially related services,” he said.
Checking account deposits for Wainwright Bank & Trust in Boston have increased 52 percent in 2000, said Steven F. Young, senior vice president at the $339 million-asset bank. He credits the growth to the recent mergers, pricing and the bank’s socially responsible stance.
The $75-million asset Rockport National Bank has also experienced a rise in deposits, which its president, Peter Anderson, credits to the opening of a new branch in Gloucester.
While core deposits spiked due to mergers and divestitures in the region, the growth rate for savings accounts has slowed, said Robert Terravecchia, president and treasurer of the $104 million-asset Weymouth Co-operative Bank. Checking accounts and CDs have actually gone up, he said: “If you step back as a whole and look at the banking industry vs. the mutual fund industry vs. the insurance industry and alternative financial services providers, banks are losing market share.”
Unless there is a dramatic downshift in the economy, banks will rely even less on core deposits in the future. “Fifty-two percent of people today will invest in mutual funds, whereas in 1980 it was only 25 percent. The mutual fund industry has gone from a million-dollar industry to a trillion-dollar industry. That money is coming from somewhere and a lot of that is coming from the banking industry,” he said.
Although Terravecchia said that Weymough Co-operative is still attracting core deposits, it will probably look toward the Federal Home Loan Bank as a source of additional funding.
“I know some banks that have taken their balance sheet – [let’s take as an example] an $80 million bank – and they’ll go out and borrow $50 million to $60 million from the FHLB and overnight become a $140 million bank. They’re not getting it from deposits; it’s wholesale, it’s just money. Wherever they can get it cheapest is where they’re going to get it,” he said.
In Western Massachusetts, core deposits are becoming more difficult to attract, said Donald Lynch, executive vice president and chief financial officer of the $550 million-asset United Co-operative Bank in West Springfield. For the last few years, area banks have benefited from the large regional banks merging and consolidating or retreating from the area altogether. “But that source of funding is drying up. Since there really is no new business coming into the areas – we’re talking Western Massachusetts – what we’re doing in the banking industry is stealing from each other,” he said.
‘Banks for Banks’
Lynch said his chief source of alternative funding is the FHLB “because they provide ready cash when we need it. It’s reasonably priced. As members of the bank, we have a credit line we can access. They’re a bank for banks, really.” But other alternative funding is also a possibility if it becomes necessary such as the more costly brokered deposits.
“I think the home loan bank, coupled with being able to sell your loans on the secondary market, has been able to help temper the difficulty in raising those core deposits. But it’s definitely a challenge for us, and I don’t think it’s going to go away,” said Terravecchia.
As of June 2000, FHLB loans totaled $427 billion nationwide. About $23 billion of that came from the Boston region, according to M. Susan Elliott, executive vice president of member services. That represents more than $10 billion in new growth from 1990 figures, she said. More than two-thirds of the member banks have joined during the last 10 years as well. The new membership is part of the reason for such a growth in loans. The Financial Institutions Reform and Recovery Enforcement Act was passed in 1989 and opened the door for commercial banks to join the FHLB system, she said.
“And again, the commercial banks never had access to the FHLB before. So they joined the system and began to use us as a funding source, so that’s a big driver for the entire home loan bank system in terms of growth in advances.
“Individuals and companies have gone to the stock market instead of using deposits as the source of their investments. So advances have grown because deposits – traditional funding – have been harder and harder to come by,” she said. More than 75 percent of the members of FHLB borrow from the bank, she said.
The legislation also opened the doors for credit unions to join the FHLB. According to Massachusetts Credit Union League Senior Vice President for Public Relations and Marketing Robert B. Kimmett, core deposits are also growing at area credit unions, primarily in the checking and transaction side. Between the beginning of 2000 and mid-year, checking accounts and the dollar volume of checking were both up by about 20 percent, he said. But Kimmett also cautioned that while the percentage seems high, credit unions are a small slice of financial institutions as a whole and therefore a small jump can result in a large percentage.
While some credit unions are drawing on the FHLB for funding, others are relying on corporate credit unions for funding, he said.
Although the ratio of loans to core deposits is increasing at many financial institutions, Kimmett said the key to surviving any economic downturn is careful lending.
The FDIC report said small banks in the New England regions are stable but the softening economy and slow growth of deposits may result in some banks increasingly using funding sources that may result in a decrease in liquidity.
