Sliding Down a Narrowing Slope
On October 31, 2019, The Fed Funds Target Range was lowered by another 25 basis points to 1.50-1.75%. Since August, rates have been lowered 3 times. It is now clear that institutions must have a strategic plan to proactively manage their balance sheet and maintain spreads as rates slide down. When deposit rates are lowered, the concern is generally runoff, or that deposit holders leave. To replace funds, an institution may turn to FHLBank Indianapolis advances. As your institution evaluates deposit rates in this low rate environment, consider calculating the marginal cost.
Learn more about Evaluating Marginal Cost with Decreasing Rates
Time to Adjust Deposit Pricing?
It is a best practice among depositories to consider the marginal cost of funds when embarking on
deposit pricing strategies designed to increase balance sheet funding for asset growth, particularly
during times when rates are rising. Recently, market interest rates have dropped dramatically, but
many community depositories, for example, are still offering CD specials or other deposit products at
rates greater than 2%. Even without taking into consideration the effect of cannibalization that
increases marginal cost, but rather, just considering the rate by itself, FHLBank Indianapolis advance
rates are often lower.
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Down Interest Rate Strategies
Today’s interest rate environment feels like we are in an elevator in which all the buttons have been pushed, and we're not sure which direction it will take us next. With the Fed Funds Target Rate being decreased by the Federal Open Market Committee (FOMC), institutions have to think about whether their strategies may have to be adjusted. If rates are going down, here are some funding issues to consider.
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LIBOR to SOFR
On Tuesday, January 15, 2019, FHLBank Indianapolis issued its first SOFR-indexed bond, the fourth SOFR issuance for the FHLBank System overall. Global regulators are pushing for LIBOR (the London Interbank Offered Rate) to be phased out by the end of 2021, and SOFR is the recommended alternative. The introduction of SOFR and transition away from LIBOR is a complicated process; below are some questions that are answered to help our members better understand these significant market changes.
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Many depository institutions are evaluating whether to raise deposits rates to generate additional funding (or to prevent deposits from leaving). Member Link provides members access to a tool that helps evaluate the impact of increasing deposit rates by calculating the marginal cost – the true cost of new deposits generated.
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When looking for fuel to sustain or rev up a loan engine, institutions look primarily to two types of funding – deposits or wholesale borrowings. Just as there are different sources for wholesale funding, there are different sources for deposits. Core retail deposits bring an undeniable value to an institution. Brokered Deposits become part of total deposits, but are they providing the same value and are they always the best choice?
Learn More about Brokered Deposits
Should you raise your deposit rates?
After each rate hike, industry analysts like to speculate if banks and credit unions will be increasing deposit rates. When a rate increase occurs, do you follow? By how much? It is important to have a plan in place to think through this decision. Determining the marginal cost associated with increasing deposit rates is an important part of making that decision.
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Living in the Midwest, weathermen often warn viewers about converging cold fronts that will collide with high precipitation in a stalled low-pressure area resulting in multiple inches of snow. The banking industry is showing signs of several factors coming together, and many of the regulators are taking notice and sending a warning message. These warning signs point towards conditions that could create unexpected lack of liquidity. Are you monitoring the signs and planning for a potential storm? What are these warning signs?
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Amortizing Mortgage Advances
Residential mortgage securities and 1-4 family mortgage loans continue to be attractive assets to acquire. Holding residential mortgage assets on the balance sheet can provide income and collateral for future borrowing needs, but it can also impact an institution’s interest rate risk exposure. Selling long term mortgage originations has been a strategy used by some, but this means giving up high-quality earning assets. The FHLBank Indianapolis amortizing mortgage advance can help by providing long-term funding with amortization and prepayment characteristics built into the repayment structure of the advance.
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The bullet advance is one of the oldest FHLBank Indianapolis credit offerings. Over the years, FHLBank Indianapolis has provided members with a variety of funding structures, such as advances with floating rates, fixed rates, amortizing terms, pre-payments options, and interest rate caps. With structures becoming more complex, it may seem that the "plain vanilla" bullet advance would go the way of the flip phone; yet, simplicity, flexibility, and a lack of optionality often make the bullet advance a funding manager's favorite tool.
Learn more about Bullet Advances