I am pleased to introduce three+one’s Summer Blog Series. As there are five Tuesdays in August, I will be addressing the top five questions the nation’s public and Higher Ed financial officers ask me as I travel across the country.
The five questions I’ll most likely be asked are:
Given less bank branches and more efficient online banking services, how come my banking costs aren’t going down?
Why are banks no longer interested in my deposits?
Are there opportunities to earn income on my operating cash while still staying safe and liquid?
Which is better when paying for bank services, hard fees or soft fees?
In today’s banking environment, does it still make sense to issue banking RFPs?
There’s one main sentiment that stems from the United Kingdom’s recent decision to leave the European Union, and that’s fear.
Many public officials are contacting us and asking:
“How will ‘Brexit’ impact my entity and should I be fearful or concerned?”
Here’s what you can expect from the Brexit decision:
The federal-funds target rate range of 0.25% to 0.5% (set last December) is here to stay until more economic data is released, as Fed officials denoted an “uncertain economic outlook” as their main rationale for that range. This also explains the recent upswing in U.S. treasury and bond prices. The apprehension in the market and the outlook on future economic performance (brought forth by Brexit) has caused bond prices to rise, which means a further decline in bond yields.
Why? Fixed-income investments are the world’s safest investments because the U.S. government guarantees them. With such assurances, investors around the globe flock to U.S. treasuries and bonds in order to protect their assets from national and international economic insecurity.
If your entity was looking for the perfect time to borrow money—and you had budgeted a particular amount for debt service—now is the perfect time to maximize your entity’s ability to borrow more money more inexpensively.
When it comes to your cash position, there’s an even further need for public entities to maximize the usefulness of their liquidity position. Deposit rates will continue to remain stagnant and could even fall slightly.
Although private retail lending has slowed this year compared to last, the Fed’s rate-holding pattern could indicate private expansion in many U.S. communities. As individuals and private enterprises realize that the next 12 to 18 months may be their last chance to borrow at a significant discount, you can expect to see increased lending to private enterprises and individual retailers, leading to new developments in many areas.
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Last week—six years after the enactment of the Dodd-Frank Wall Street Reform Act of 2010*—31 of the largest U.S. banks received passing grades on the Federal Reserve’s “stress test “ requirements. The purpose of this test was to ensure that the largest banking institutions were able to stand on their own in case of another financial crisis without any added support of the federal government.
Does this mean that the Fed is done telling the banks just how “high to jump”?
The answer is “no.” In fact, it should be considered the “new normal” for banks.
I expect the following trends to continue for banks:
The Fed will continue raising the ratio of capital to liquidity requirements on the largest banks as a form of control against economic risks.
Banks will continue to be sensitive to the level of deposits they gather and the deposits rates they offer. Operating cash will be pursued while non-operating and reserve deposits will be shunned.
Banks will focus more on lending and transactional services than on deposit products.
The level of risk and compliance sensitivity will be paramount in managing client relationships on all levels.
Client selection will be based on revenue and cross-sale potential. In addtion, banks will reverse from the call center approach to in-person bankers in order to deliver more complex solutions and improved technology.
Bank charges for services will transition from “soft costs” to “hard charges” for greater transparency. The net effect will actually benefit both sides of the banking relationship.
Banks will partner or purchase third-party financial tech companies to streamline technology advancement and offer an enhanced client experience.
The banking industry is not an easy business to be in these days. The pressures banks feel are a result of more intense and more complex government regulations.
Bankers are an important part of day-to-day business activity and they deserve our support and understanding. They are the backbone of the U.S. economy.
If we all had to deal with the ever-changing rules and regulations from Basel III, the Dodd-Frank Wall Street Reform Act, the Volker Rule, the Durbin Amendment, etc., we would be ready to take a permanent vacation. However, our banks have done an outstanding job in an industry that we all need and use on a 24/7 basis.
*Note: In July 2010, when Dodd-Frank was signed into law, it was 2,300 pages in size—with additional regulations to be established going forward. Six years later it is over 20,000 pages and still counting!