2017 Funding and Deposits Report

The marketplace for deposits remained relatively stable throughout 2016. The small increase in the federal funds rate at the end of 2015 did raise the cost of funding, but, overall, funding costs stayed at historically low rates and most banks—money center institutions, large regional banks, and community banks—remained fairly flush with deposits.

As we enter 2017, the question is how and when will the current state of affairs change? Will this be the year when the demand for deposits begins to push the cost of funds back to pre-2008 financial crisis levels? Or will banks continue to experience a slow but steady rise in the price of deposits?

This inaugural “Funding & Deposits Report” looks closely at the trends driving the marketplace for deposits and provides an overview of the perspectives of C-level banking executives for the year ahead.

Highlights of the report include:

  • The Environment for Bank Funding & Deposits in 2017. Sixty-nine percent of respondents reported that they expect to experience a moderate increase in funding costs within the next 12 months. That expectation is three percentage points higher compared to responses captured at the same time last year.
  • Composition and Accessibility of Bank Funding. Respondents indicated that they have experienced very little change in the accessibility of deposits. This experience is also reflected in overall industry data. For the past 10 years at community banks, deposit growth has consistently outpaced loan growth, keeping loan-to-deposit ratios at low to moderate levels and banks relatively comfortable with their ability to access funding. While loan-to-deposit ratios have risen a little at community banks in the past year, they now stand at 78%, below the peak of 83% at the beginning of the financial crisis.
  • The Pursuit of Deposits. Larger community banks (banks with $1-$10 billion in assets) reported pursuing new deposits at a rate that is higher than the rest of the banking sector. In particular, larger community banks are aggressively pursuing corporate deposits, and they expect the biggest source of competition for these deposits to be other large community banks, as opposed to money center or online banks, for example.
  • Money Market Mutual Fund Reform. Most community banks reported seeing little impact on deposit availability from the change in money market mutual fund (MMMF) rules. Larger community banks were more likely to report that the MMMF rule change has increased deposit availability. These larger community banks were also more optimistic that MMMF reform would increase availability of deposits in the future.
  • Attracting Deposits. Despite a growing reliance on online banking, a large majority of respondents indicated that they see in-branch sales as being the most important channel for attracting retail deposits. Sixty-three percent of respondents indicated that they see branch sales as “very important” in attracting retail deposits, double that of any other marketing channel. There was little difference in the response from leaders at community banks with less than $1 billion in assets and those at banks with between $1 billion and $10 billion in assets.

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