TBS is a leading financial technology firm founded in 2005, with its Insured Deposit Programs as its core business. TBS’s IDP is a cash sweep service providing wealth management firms with extended FDIC insurance, daily liquidity, and highly competitive yields on behalf of their clients. Participating banks are able to enjoy a stable, diversified, and cost-effective source of deposit funding. TBS currently has $85 billion in assets under administration (AUA), with 90+ institutions sweeping balances to 135 FDIC-registered banks.
In the current environment, bank capacity is the single most significant challenge for wealth managers seeking to place balances at competitive rates. The pandemic-driven macroeconomic fallout and attendant low interest rate environment continue to create record-breaking excess liquidity across the financial system. This has resulted in banks dramatically lowering their wholesale borrowings (including IDP) and the rates they are willing to pay on such funding.
With businesses remaining shuttered and/or operating in a diminished capacity, lending remains dramatically curtailed. According to the FDIC, year over year loan growth was $272 billion, versus $2.5 trillion in deposit growth. As a result, Loans/Deposits – a primary measure of bank liquidity – was 62% systemically, representing the lowest-ever level. This implies that approximately 38% of banks’ deposits are funding very low-yielding assets, or earning a paltry 10 bps in excess reserves. When combined with the near-zero rate environment, banks’ net interest margins (NIMs) are at an all-time low of 2.68%.
We continue to closely watch the Biden administration’s plans to pass a $1.9 trillion COVID-relief stimulus package. The Federal Reserve Bank of NY published a study in December revealing that 35% of all such stimulus monies sit idly in consumers’ checking accounts. This further exacerbates banks’ ability to accommodate additional funding.
The effective fed funds rate (EFF) continues to trend at .08% due to excess systemic liquidity. Currently, there is no firm timeline for when this will revert to .09% or higher. There is mounting speculation that the Fed will increase IOER and overnight repo. This would provide parallel support to EFF and other short-term rates that are inching closer to zero.
Despite these pressures on pricing and capacity, TBS’s IDP continues to maintain its strong competitive advantage over money market fund yields, with rates on new capacity that are 9-11 bps better than MMFs. Spreads on legacy capacity are currently 14-16 bps higher than MMFs.
CAPACITY. TBS manages inflows and outflows by requiring that all banks set contractual target and maximum balance levels. This allows for the accommodation of unexpected surges and/or withdrawals. In addition, TBS maintains a capacity pipeline equal to a minimum of 20% of existing program balances, and will accelerate the onboarding of these banks as needed.
PRICING. Given the aforementioned challenges faced by the excess liquidity across the banking system, pricing on new capacity is now well below the pre-pandemic spreads of 25-35 bps over the effective fed funds. Such pricing and placement is evaluated on a bank-by-bank basis, taking into consideration the accretive or dilutive impact on a given program’s weighted average gross bank rate.
TBS effectively utilizes its anchor bank strategy, whereby large depository institutions paying higher rates will take sizeable tranches that serve to maintain competitive program rates.
Using our proprietary Bank Monitor© risk assessment platform, TBS monitors the safety and soundness of all banks on an ongoing basis, and will make the necessary recommendations should a bank begin to display heightened levels of counterparty risk. Bank Monitor’s© robust early warning indicators have resulted in TBS never experiencing a failure of a program bank.
On December 15 the FDIC finalized its ruling on brokered deposits, wherein they more clearly defined what constitutes a “deposit broker” and, by extension, the classification of the deposits administered by such parties.
While certain aspects of the ruling require additional clarification from the FDIC over the coming weeks, the outcome provides, under the appropriate circumstances, the opportunity for banks to classify these insured sweep balances as non-brokered deposits. Companies providing these funds would have to first qualify under the Primary Purpose Exception, which states that the agent or nominee’s primary purpose is not the placement of funds with depository institutions. Companies meeting this qualification would be permitted to place up to 25% of the client assets under administration (AUA) with depository institutions. This would require notification to the FDIC by April 1st of this year. Amounts greater than 25% would require submission of a formal application to the FDIC.
Allowing banks to classify these deposits as non-brokered has a number of advantages including, but not limited to, improved balance sheet optics; lower deposit runoff assumptions; and the creation of greater headroom for brokered deposits. For the 30+ large banks required to be compliant with the Basel III Liquidity Coverage Ratio (LCR), the advantage is significant: 30-day deposit runoff rates would decrease from 25% to 10%, and perhaps as low as 3% should the deposits qualify as retail only. These LCR banks currently hold approximately 75% ($800 billion) of the $1.1 trillion of total reported brokered deposits.
The aforementioned advantages should result in a measurable increase in demand for these balances and, by extension, the rate banks are willing to pay. Of course, the excess systemic liquidity discussed above will need to dissipate before such benefits can be realized.
The distribution and efficacy of the COVID vaccines is expected to play a major role in determining when the economic recovery will gain steam, and the magnitude by which the attendant growth will occur. Banks are currently forecasting the beginnings of a reversion to normative lending activity by late Q4 or early 2022, depending on how quickly “herd immunity” will be realized.
Once lending heats up – particularly in the commercial and industrial sectors (C&I) – banks’ balance sheets will begin rightsizing, resulting in a resumption of appetites for wholesale funding. Meanwhile, TBS expects to maintain its competitive advantage via IDP’s spread advantage over money market funds throughout the economic recovery period.