Kroll Bond Rating Agency (KBRA) releases this month’s edition of The Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk: The After-Show.
This month’s newsletter, Bank Treasurers Sit Down With the Editor, focuses attention on the new accounting rule, Current Expected Credit Loss (CECL), and the positive message the industry delivered this month with the release of Q3 2020 results, namely, that reserve building for COVID-related losses has probably peaked. On the bright side, industry leaders appeared to confirm that some mix of working from home and going into the office would be instituted post-COVID, which could lead to cuts in operating expenses. The bad news was there are few avenues open to bank treasurers to offset current downward pressure on net interest income from growing excess deposits. This is because a low rate environment and a flat yield curve discourages them from reaching for yield by extending duration in the bond portfolio, and also because deposit rates are very close to the bottom of where they were the last time the Fed Funds rate was at 0%.
Against the backdrop of the political debate over further COVID stimulus, the Bank Treasury Chart Deck looked at the size of the national debt, currently at over $27 trillion and exceeding GDP by $7 trillion, and examined the role of the U.S. banking industry as one of its major investors. Drilling down, the second half of the Deck reviewed Q2 2020 Liquidity Coverage Ratio disclosures by the largest banks and how the Treasury’s increased issuance and the Fed’s balance sheet expansion boosted their ratios during 1H 2020. The disclosures also revealed how their nonoperational deposits, fueled by the Fed’s quantitative easing, grew in the same period.
In this month’s edition of Bank Talk: The After-Show, Van and Ethan consider the question of whether the accelerated trend and the public’s growing acceptance of contactless banking—with retail depositors opening up accounts with mobile devices and never stepping once into a physical bank branch—somewhat changes the quality of a bank’s core deposits that offers a mobile channel. A key assumption about core deposits is they tend to be sticky, requiring the public’s unhappiness over the rate paid on deposits to overcome the inertia of the "hassle factor" in switching accounts to another institution. However, the banking industry has been marketing mobile banking for its user-friendly applications, literally letting people conduct banking while on their sofa, theoretically reducing this hassle factor. When the Fed eventually raises rates again, mobile-originated retail deposits may turn out to be less sticky than traditional branch-originated deposits.
Further, Van and Ethan look at data connecting the low rates which have persisted since the global financial crisis (even when the Fed was raising rates between December 2015 and December 2018) and the surge of institutional funding, with noninsured deposits driving the growth in total deposits over the past decade.
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KBRA is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA. Kroll Bond Rating Agency Europe Limited is located at 6-8 College Green, Dublin 2, Ireland.
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Ethan M. Heisler, CFA
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