Hot, Hot, Hot

Bank deposit rates are becoming more competitive in our rising-rate environment. Does that mean the past strategy of bidding between multiple banks in search for the highest yield, (considered “hot” money), is back?

For many reasons, the answer is no.

First, with more public money in the marketplace, complicated regulations, and more paperwork, public deposits are simply less attractive to banks.

Second, banks can’t pay higher deposit rates long term if they’re unsure on how long the deposits will stay at the bank.

Third, the percentage required for banks to put aside for bank liquidity purposes—the Liquidity Coverage Ratio (LCR)—continues to mount. This gives banks very little room to use such deposits on their balance sheets for lending purposes. Layer that with collateral requirements and banks are less eager to seek such deposits.

Fourth, banks today want more transactional business—not just your deposits. Hunting for higher deposit rates will leave you with few, if any, bidders.

Fifth, a majority of public entities restrict their banking business to banks within their boundaries. With fewer community banks on the scene, the remaining ones don’t need to compete for public deposits.

Lastly, thanks to years of a low-rate environment, public entities have become less proactive in the “yield hunt”; safety and liquidity are now their main focus.

At three+one we can help public entities learn the true value of their funds in the marketplace. In turn, banks will appreciate what your deposits are worth; that can help you net higher long-term yields.