TBS Insights

Market Update July 2021

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 $83 billion in assets under administration (AUA), with 90+ institutions sweeping balances to 135 FDIC-registered banks.

Market Forces Impacting TBS’ IDP Pricing and Capacity

In the current environment scarcity of bank capacity remains 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.

According to the FDIC, year-over-year loan growth (net of reserves) reflected a decrease of $154 billion, versus $2.7 trillion in deposit growth. As a result, the Q4 Net Loans/Deposits – a primary measure of bank liquidity – was 57% systemically, representing the lowest-ever level on record. This implies that approximately 43% of banks’ deposits are funding very low-yielding assets, or earning only 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 2.56%.

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 as they seek to manage targeted total asset levels and attendant leverage ratios.

The effective fed funds rate (EFF) had dipped further, to .05%, due to excess systemic liquidity. Consequently, the FOMC voted on June 16th to raise the interest on excess reserves rate (IOER) from .10% to .15%. This resulted in EFF increasing to .10%.

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 9-12 bps better than MMFs. Spreads on legacy capacity are significantly higher, allowing IDP to offer a competitive pricing advantage of 14-16 bps higher than MMFs.

MMFs have been forced to manage down their expense ratios in an effort to provide even the .01% and .02% returns noted in the chart above. At the start of the pandemic, the expense ratio on the TBS-Tracked Gov/Trsy MMF index were .168%. As of today, that expense ratio is .05%.

TBS IDP & Bank Capacity Management

CAPACITYTBS 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 seeks to maintain a capacity pipeline and will accelerate the onboarding of these banks as needed.

PRICINGGiven the aforementioned challenges faced by the excess liquidity across the banking system, pricing on new capacity remains 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. While a number of program banks have priced their balances lower, there remains a significant level of legacy balances at competitive rates that continue to provide competitive returns overall.

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.

Regulatory Environment

The FDIC’s brokered deposit ruling went into effect on April 1, with the amendment to the regulation seeking to more clearly define what constitutes a “deposit broker” and, by extension, the classification of the deposits administered by such parties.