Strengthening bank liquidity starts with understanding where your money is coming from and where it might be going.
For the majority of banks right now, the following two statements are true:
- They have substantial cash reserves at the moment.
- They might be facing liquidity challenges in a year or even six months from now.
The first statement – about substantial cash reserves – is based on customers’ flight to financial safety in the spring and early summer of 2020 because of the sudden economic downturn and near-term economic uncertainty. In addition, the federal government pushed out a vast amount of stimulus funds in the form of payouts and loans, much of which ended up in banks.
With respect to the second statement – about upcoming liquidity challenges – one of two scenarios most likely will unfold in 2021. One possibility is that the economy will improve significantly due to the end of state-mandated shutdowns, leading many consumers to start spending and investing more. The other is that the economy won’t bounce back quickly, stimulus and assistance funding won’t be readily available, and millions of unemployed or underemployed Americans will have to draw heavily on their accounts to pay for basic necessities.
In either of these situations, large sums of money potentially could flow out of banks, which would present a major liquidity problem if the banks have deployed the cash reserves on more loans. So the first question is, how much of this sudden influx of money will stay in the bank for the next several months?
Unfortunately, that question will be very difficult to answer until it’s already too late – which brings us to our next question: How can banks convert as much of this incoming cash as possible into core deposits that are sticky, retainable, and not interest-sensitive?
Our specialists identified the following ways banks like yours can assess new accounts and plan to capture long-term customers.