By Bill Poquette and Alaina Webster
Liquidity is a top concern of both bankers and their regulators. As such it occupied a prominent spot on the program for the Missouri Bankers Association’s recent Executive Management Conference. As one of the leadoff speakers for the Dec. 5-7, 2018 meeting in Kansas City succinctly described the situation, loan growth continues to outpace deposit growth, and banks have shifted cash flows from investments into loans.
Joe Kennerson, managing director of Darling Consulting Group, outlined two kinds of strategic considerations for liquidity management. For “stonger” liquid assets, he advised keeping cash working, identifying the potential to shift liquidity into loans, considering more of a defensive deposit strategy, maximizing alternative funding sources and developing a strong contingency funding plan. With “tighter” liquid assets, define the bank’s liquid asset cushion, consider more offensive deposit pricing policies, weigh alternative pledging options and maximize alternative funding sources.
Among initiatives he suggested for improving liquidity were these: Have a banking model for the top 100 customers; identify “at-risk” customers; look for opportunities within that can be addressed with direct marketing programs; track new money vs. cannibalization; and revisit your money market account tier structure.
In their deposit strategy sessions, Kennerson believes bankers should determine whether an offensive or defensive posture serves best, and discuss potential hurdles by exploring all options, thinking about new money initiatives and how to roll them out, and looking at minimum balances and relationship-based pricing. Other appropriate topics are marketing efforts more focused on specific markets and frontline sales training.
If liquidity was top of mind for the Missouri bankers, the November midterm election results were still fresh in mind, and they were treated to an informative Washington update from James Ballentine, executive vice president of congressional relations and political affairs for the American Bankers Association.
The audience was advised that banking will not be at the top of the agenda of the new Congress. “What we saw in the last Congress, turn that all on its head,” said Ballentine. Health care and infrastructure will be the focus of the new House Democratic leadership, in his view.
“Almost all that concerns this audience originates in the House Financial Services Committee,” he said. It is a very powerful committee whose incoming chair, Rep. Maxine Waters, D-Calif., is passionate about housing, community development institutions and the Community Reinvestment Act. “We are, too,” said Ballentine.
She will protect the Consumer Financial Protection Bureau, work for flood insurance renewal and support regulatory relief for credit unions. In fact, she is seen by the ABA as “a big fan of credit unions,” in Ballentine’s words.
Noting that ABA’s agenda doesn’t change depending on who is in Congress, Ballentine reported that cannabis banking has become a top priority. A draft bill is being worked on and hopefully will be introduced soon. After the 2018 midterm elections, 33 states have now legalized marijuana to some degree; at least 10 allow recreational use.
“You’re probably working with a marijuana business even if you don’t know it,” he told the MBA members. Missouri voters approved cannabis for medicinal use in the fall balloting, so the bankers are facing the issue of state legalization of a federally prohibited business.
Federal legislation to resolve this dilemma has been introduced in the past but has languished in Congress. One problem the ABA sees with this legislation is it doesn’t go far enough in protecting all the businesses that touch marijuana businesses — landlords and multiple suppliers. Another factor impeding progress is several committees besides Financial Services are involved with the issue — Agriculture and Transportation for example.
Other priorities for the ABA in the new Congress that were cited by Ballentine include CRA modernization, which regulators are working on; data security, so that Congress will act before another major breach; CECL, which requires presumptuous estimates of credit losses; government-sponsored enterprise reform, which ABA doesn’t see moving through this Congress; and a Regulatory Reform Part II bill.
Afternoon breakout sessions saw attendees discussing fintech, cash incentives and core vendor relationships. BancAlliance CEO Brian Graham began his session, The Rise of Shadow Banking and Fintech, by warning the audience that every single part of banking is subject to attention from companies large and small looking to “disrupt” the status quo.
“Banks should be afraid,” he said, citing the increasing competition between banks and non-banks. “There is a lot going on. There are a lot of smart people with a lot of money that are trying to find ways to compete with banks.”
However, he suggested that banks can convert threats into opportunities by keeping their fingers on the pulse of innovation. Graham urged banks to talk to people in their 20s and ask what financial apps they’re currently “playing with.” While buying or building new tech on the scale of a big bank may not be feasible for community-sized institutions, partnering with a fintech is much more achievable. There is a range of potential types of partnerships with varying implications and challenges available.
“Integrated partnerships are likely the best option for community banks that lack the scale to buy or build and do not have a robust team in the relevant product line,” Graham and fellow presenter Lori Bettinger, executive vice president at BancAlliance, noted.
Moving from theoretical tech to existing tech, Trent Fleming, founder of Trent Fleming Consulting, walked bankers through choosing and negotiating contracts with a core vendor.
Regarding contracts Fleming sees three keys to success:
- Negotiate well. Be aware of liability and exposure risks.
- Consider how these decisions could impact merger and acquisition possibilities from both sides.
- Establish a baseline for costs and check your billing statements carefully.
As for issues Fleming commonly sees in contracts that banks should be on the lookout for:
- Annual price increases: Be aware of standard price increases. Moreover, keep in mind these adjustments are often scattered throughout the contract, not listed in one, convenient location.
- Third-party liability protection.
- Shared development costs.
- Service level agreements: Ensure your contract treats all times equally. Peak usage times should have the same costs as non-peak usage times.
- Termination: Be sure that there are clauses built into a contract for natural termination, early termination and termination for unintended consequences.
Bill Poquette, Editor-in-Chief, email@example.com; Alaina Webster, Managing Editor, firstname.lastname@example.org