Rising deposit levels—a boon to the banking industry following the financial crisis—have become a major challenge. A perfect storm of industry conditions—an expanded money supply, customer delevering, weak loan growth, near-zero rates, and regulatory developments —have upended the virtuous cycle of deposit gathering and lending. Many North American banks—seeking to enhance profitability and uncertain of the stability of these recent liquidity inflows—are actively seeking to stem the growth or even work down their deposit balances.
In our experience, banks in this environment need to more precisely differentiate and target specific deposit types to support balance sheet and margin objectives. Successful differentiation strategies leverage an in-depth understanding of customer deposit behavior. For treasury, the new playbook includes development of a more precise risk profile of the deposit portfolio to improve the effectiveness—and potentially reduce the cost—of liquidity portfolios. For business lines, enhanced pricing strategies based on elasticity will enable banks to drive balance growth and retention in target segments while digging deeper for margin elsewhere. Underpinning these changes will be enhanced FTP frameworks that more precisely capture the behavioral characteristics of deposit segments.