BANKING LIKE YOU MEAN IT Linda T. Patterson Patterson & - - PowerPoint PPT Presentation
BANKING LIKE YOU MEAN IT Linda T. Patterson Patterson & Associates, Austin Current Circumstances Rates Todays rate environment Regulations Liquidity Leverage Stability = Goals of the System Relationship
Linda T. Patterson Patterson & Associates, Austin
Rates
Today’s rate environment
Regulations
Liquidity – Leverage – Stability = Goals of the System
Relationship
Expedited funds goal Bank account structure
1.00% 1.50% 2.00% 2.50% 3.00% 3.50% Fed Funds 3mo 6mo 1yr 2yr 5yr 10yr 30yr Sep-18 Aug-18 Jun-18 Apr-18 Jan-18 Oct-17 .
End of Month Rates - Full Yield Curve – Fed Funds to 30yr P e r c e n t …
Current rates 5.25% Prime Rate Steep yield curve
Banks need it Borrow cheaply from depositors and loan out higher
Loan demand
Banks need it
Banking today is controlled and ruled by regulations
Dodd‐Frank Basel III
Primarily regulations are directed at economic stress Regulations on certain deposits cost the banks Banks still want to service you but not hold your funds
Bank of International Settlements
Central banks working for monetary and financial stability
Objectives
Strengthen risk management through regulation Strengthen banks’ ability to absorb shocks Assure banks have reliable, stable funding during stress Protect the markets and economies underlying them
Central banks use these guidelines to set their own rules
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Liquidity Coverage Ratio Net Stable Funding Ratio
Requires banks to hold high quality
liquid assets (HQLA)
Requires reserves to meet all liabilities
in a 30 day stress scenario
HQLA includes cash, reserves,
government & corporate debt
Potentially limits banks from making
loans
NSFR seeks to reduce a bank’s funding
horizon by promoting longer term funding sources
Reduces dependency on short term
funding
Encourages funding stability Aims to better assess funding risk Public entities are not stable deposits
Demand for high liquidity (HQLA) reduces securities available to serve as collateral Banks absorb significantly higher costs for public sector vs. corp. operating balances Banks are encouraging non-operating balances to off–balance sheet vehicles
such as money market mutual funds in the form of sweep
For every $100 mm in corporate deposits ‐30 day run‐off during event = 25% ‐Required bank liquidity = $25 mm For every $100 mm in public deposits ‐30 day runoff during event = 40% ‐Required bank liquidity = $40 mm PUBLIC DEPOSITS JUST COST MORE
Banks will try to reduce collateral
Collateral costs a bank about 10‐12 bps Collateral raises leverage and lowers liquidity
Banks add fees to address regulatory burden
Based on the balance you keep in bank
Banks trade investment for service
Focus is on service not deposits
Reduce your balances Use alternative collateral
Essentially letters of credit
Bank sees cost differential and ease of use for bank
Securities cost about 10‐12 bps. and a LOC 5 bps.
What is a LOC? How do I use it?
Irrevocable LOC at a set amount for a set time An LOC is not a US security and has no government guarantee FHLB is a banker’s bank owned by the member banks Credit backing comes from the member banks Time requirements for amount changes System stress spectre
Based on type of account – a change in definitions
All time and savings accounts = $250,000
Includes NOW and money market accounts
All demand accounts = $250,000
Includes interest bearing and non‐interest bearing
Based on location of bank
If the bank is outside the state all deposited are lumped together This has changed from ‘headquarters”
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Small entities and small accounts County X has: $585,000 in demand accounts $195,000 in time and savings accounts The County has $445,000 in FDIC coverage FDIC coverage is calculated $250,000 (demand) + $195,000 (savings)
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Testamentary accounts exception Political Unit Accounts If created under express authority of law Has some function of government delegated If it executes exclusive control of its funds for exclusive use Special cases 4a and 4b corporations Water supply corporations
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Two methods which hinge on rates
Compensating balance basis
Traditional for public entities You leave money in bank which earns $$ and pays the bill You never see the charge – it looks “free” The cost is the use of your money and its potential earnings
Fee Basis
You pay the fees for the service by debit to the account
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Volume * price = Fee or Balance Required
An account analysis simply shows The services used and the price for each under both payment methods.
Fee Comp A monthly review of your account analysis is an important treasury responsibility and best practice.
County earned $4,078 but needed only $ 2,569 Left $1,509 behind You can demand a “carry-
The All-important Account Analysis Your invoice for service
BASED ON FEES SET BY CONTRACT Mo. Contract Total Service Description Vol Fee Cost Master Account Maintenance Fee 8.0000 0.00 Subsidiary Account Maintenance 8.0000 0.00 Money Market Account Maintenance Fee 8.0000 0.00 0.00 Investment Sweep Maintenance 50.0000 0.00 Dr/Cr Sweep Transaction Fee 0.0000 0.00 ZBA Account - Subsidiary 8.0000 0.00 0.00 Checks/Debits Posted 0.0500 0.00 Branch Credits Posted - Electronic 0.1000 0.00 Automated Services - Balance & Detail Acct Balance Report 0.00 Online Access Maintenance Fee 5.0000 0.00 Online Access Subscription Fee 5.0000 0.00 Previous day Reporting 10.0000 0.00 Previous Day Dr/Cr Items 10.0000
0.00
Image Capture Per Item 0.0300 0.00 Image Retention Per Item 0.0200 0.00 Branch Deposits Commercial Account Maintenance 20.0000 0.00 Branch Credits Posted 0.5000 0.00 Branch Immediate Verification 0.1000 0.00 TOTAL FEES AT CURRENT MONTH VOLUMES
From the monthly account analysis, input the volumes for each service. Match the total fees in the spread sheet to the account analysis. If they do not match then a fee is wrong. Check it! A critical monthly responsibility and control
Create a monthly CHECKLI ST for your analysis fees.
Regulatory fees aide in meeting new regulations
Various names but one fee
Many banks pass through a regulatory fee
Not all banks pass through – ask! – verify Usually first or last line on the account analysis
Based on bank but basically 0.12% Known by many names
Regulatory fee, Balance Based fee, Recoupment fee….
Always compare your ECR to outside options A 0.40% ECR on $10 million balance will generate
If rates outside give you 2.00% the same balance
Invest the funds outside
pay $3,333 directly and keep $ 13,333/mo ($159,996/yr)
Move to Fee Basis
Pay the bank and keep the earnings Your cost is identical – your earnings are not
Investment options through the bank
Sweeps take money out of bank Eliminates regulatory fee Does not require bank to hold collateral
Investment options outside the bank
Pools are just as liquid – transfer in as needed Do a cash flow and invest farther out
Sweeps use a daily money market mutual fund
Striving to maintain a $1 NAV Rated AAA and SEC registered Authorized investment in your investment policy A MMMF is a security you own Automatic sweeps keeps all balances at zero (or comp balance)
Zero balanced accounts Master account MMMF
Comp Balance Fee Basis A Fee Basis B ECR 0.40 % 0.40 % 0.40 %
$ 5,000,000 00 00 ECR Earnings $ 1,667 00 00 Sweep % 00 1.75 % 1.75 % Sweep Amount 00 $ 5,000,000 $ 1,500,000 Sweep Earnings 00 $ 7,292 $ 2,188 Pool % 2.00 % 2.00 % 2.00 % Pool Amount 00 00 $ 3,500,000 Pool Earnings 00 00 $ 5,833 Net to Bank (fee) $ 1,667 $ 1,667 $ 1,667 Net to You 00 $ 5,625 $ 6,354
Net Annual Earnings
00 $ 67,496 $ 76,252
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Banks reduce collateral burden You increase earnings You own collateral not have it pledged You retain needed liquidity You reduce the cost of banking
Linda T. Patterson Patterson & Associates Investment Advisors Austin, TX