Public Funds Investment Institute

Will Banks Compete for Your Deposits?

July 21, 2023

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Have bankers called you recently? Bank deposits have trended down recently, and money fund assets have risen. Now banks are gearing up to build them back up.

The following chart, courtesy the SEC’s money market reform release, illustrates the trend:

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Bank deposit rates should become more competitive as banks seek to replace deposits that have run off in recent months.

Banks are focused on doing just this. For example there is  a recent story on the American Bankers Association website that describes the strategies banks are employing.  Among them: promoting banking resilience, emphasizing service, and building trust. (Missing from the list is offering toasters.)

A cynic—or a portfolio manager—might respond “show me the money.”  To put it another way, “what’s your deposit rate today?”

There’s a technical term for the tie between rates banks pay for deposits and underlying market interest rates.   It’s known as deposit beta. Industry observers note that deposit betas are rising—bank deposit rates are going up as a percentage of underlying interest rates. Bloomberg reported earlier this week that banks are now passing through a greater percentage of the rise in underlying rates. Many of the latest earnings calls from the large banks in recent days had this common theme.

There is not a lot of transparency around bank deposit rates. Benchmarks of the levels banks will pay for deposits are not widely available and banks tend to price deposit rates based on the overall relationship with a customer rather than using standard market-driven postings. Moreover, when it comes to public agencies, public funds deposits often cost banks more because of the cost of collateral or other security, and benchmarks do not incorporate this aspect.

One indication of the rise in relative deposit rates is the levels of nearly 6% offered on one-year negotiable CDs of large money center banks. This is notably higher than one year Treasury rates that are about 5.30%.

Bottom line. . .If bankers aren’t calling, it might be time to call them.

T+1 is coming. Are you ready?

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The Securities and Exchange Commission recently approved rules to require that most securities settle one business day after they are purchased or sold. T+1 settlement will be required beginning in May 2024, replacing the current T+2 settlement cycle.

This initiative is an important, if not very well understood, effort by the SEC to reduce systemic risk that occurs between the date securities purchases/sales are agreed to (“trade date’) and the time money and securities change hands (“settle date”). Reducing the time reduces the period in which credit is outstanding and during which something could happen to impair securities transaction contracts.

There is a lot of complex plumbing related to securities settlement involving notices, confirmations, affirmations, and money movement. The plumbing is vital to the health of the markets but fortunately portfolio managers and the boards of LGIPs normally need not become plumbing experts. This is for operations, middle office, and bank custodians to deal with.

LGIPs, like money market funds, currently settle most trades on the same day they are made so their operations are designed for the time-constrained requirements of T+1. But for others such matters as bank deadlines for communicating trade information and internal requirements for confirming trade details can require significant modification.( If you do want to follow the details of the transition all you may want to know is available at this website sponsored by the Depository Trust &Clearing Corporation.)

What LGIP boards and portfolio managers should do. As with plumbing, if all works well there is nothing to do but in the coming months management would be well advised to do some diligence by seeking assurances and/or progress reports from their banks and operations staffs   that the many changes required to meet T+1 settlement requirements are in place or under way.

Briefly noted.

The Investment Company Institute reported that money market fund assets totaled $3.14 trillion as of July 20, up 13% since early March (pre-Silicon Valley Bank problems). The industry has recently experienced a strong   upsurge in assets. This is an interesting benchmark from which to assess the change in asset levels of stable value LGIPs.

Greetings, fellow colleagues in the public funds investment community! I'm Marty Margolis, a seasoned expert with a deep understanding of the intricacies of managing public sector investments. Having led the growth of PFM Asset Management and managing assets exceeding $150 billion, I am excited to connect with you through the Public Funds Investment Institute. If you haven't already — subscribe below to join our community, explore our thought leadership, and gain valuable insights. I encourage you to connect with me on LinkedIn or reach out via email to share your thoughts, feedback, and ideas. Let's collaborate and make a positive impact together.

Best regards,
Marty Margolis

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