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Debunking Deposit Dogma


Bank liquidity regulation and resulting practices were derived and honed from the learnings of the Financial Crisis. A significant portion of my subsequent banking career was focused on developing sources of “good,” sticky, core deposits (e.g., transaction accounts and retail deposits) while properly managing “bad,” more risky brokered, CD and interest bearing deposits. This dogma served the banking system well for the past 15 years until the recent, rapid deposit runs at Silicon Valley Bank and First Republic. Depositor behavior appears to have meaningfully changed since I was using a Blackberry as my primary communication tool.

In a recent issue of American Banker, my colleague and Klaros Partner, Brian Graham challenges dated deposit dogma, recognizing that “ innovation that now permits depositors to manage multiple accounts across multiple providers and to move money on a smartphone” have changed bank customer behaviors. Brian’s article shares new insights derived from First Republic deposit performance “both before and after” its deposit run. Surprisingly, supposedly risky brokered deposits “...were actually more than eight times stickier than favored retail deposits” while “time deposits were more than twice as sticky as transaction accounts.” Conversely, good “...noninterest bearing deposits ran out the door 30 percent faster than the presumably problematic interest bearing deposits.''

I strongly support Brian’s call to action for “...intense analysis of deposit behavior based on the far more robust data available to the government.” Such analyses and data should indeed be shared broadly providing banks and regulators with the tools to apply open-minded, inquisitive analytics to strengthen the banking system and debunk deposit dogma, if those old rules of thumb turn out to be inaccurate. In the near term, second quarter bank earnings commencing on July 14 followed by August 1 Call Report filings may provide new quantitative and qualitative clues to modern deposit behaviors.

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