A Community Bank with Assets of $500 Million Used CDARS® One-Way Sell® to Build High-Value Relationships and Generate Fee Income, Without Burdening Its Balance Sheet
Beginning in 2015, many of the largest banks in the country began pushing out non-operational deposits from financial institutions in response to new Liquidity Coverage Ratio (LCR) rules, which make holding money from financial institutions more burdensome for banks with more than $50 billion in assets.
A community bank with assets of $500 million in the Northeast decided to use CDARS One-Way Sell to navigate this change in the funding environment. The increased availability of financial institution deposits has enabled the bank to build new customer relationships and add a source of fee income, without negatively affecting its balance sheet.
This community bank was approached by a hedge fund customer that needed to find a place for $67 million in fund earnings prior to their distribution. Previously, the fund company had been working with a bank large enough that the fund company was comfortable with the risk of having its funds uninsured. However, that bank—now subject to LCR calculations—indicated that it would start charging the hedge fund monthly fees on its deposits. The customer wanted protection on the deposit but didn’t want to pay these new deposit fees.
The community bank was interested in the customer relationship, but at $500 million in assets, the bank did not want to add $67 million in deposits from a single customer. Kept on balance sheet, the deposit would depress its earnings numbers and tie up capital, while increasing deposit concentration, and adding to the volatility of its funding base.
The bank worked with the hedge fund to place the $67 million deposit through CDARS One-Way Sell. As a result, the bank was able to move the deposit off its balance sheet to be used by other banks in the CDARS Network that were looking for short-term funding.
By placing the deposit through CDARS One-Way Sell, the bank was able to earn fee income while moving the deposit off its balance sheet, avoiding the issues that would come with holding a large deposit from a single commercial customer on its books. (Note: If the bank’s funding needs change, it has the flexibility to move part or all of these deposits back on balance sheet as they mature, through CDARS® ReciprocalSM transactions. And if the customer needs more regular access to funds, the bank can use ICS® One-Way Sell® to place those funds in money market deposit accounts or demand deposit accounts without keeping the amount of the deposit on its balance sheet).
The greater benefit to the bank was that it was able to build relationships with the fund’s senior personnel. These high net-worth individuals brought with them opportunities in the form of their own personal assets and service needs, their potential as borrowers, and their network of relationships with other high-value customers. Meanwhile, the hedge fund was able to access FDIC insurance on its entire deposit and, rather than pay a fee on its deposit, it was able to earn a return on its deposit. A true win-win.
Learn more about CDARS One-Way Sell.