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The best pilots fly by their instrument panels. Even with a trained team of co-pilot, navigator and crew on board, pilots know there’s no substitute for the cockpit instrument panel to gauge airspeed, heading and altitude.

Financial institutions need the same kind of trusted, steady access to the most current data in order to navigate a smooth ride and a safe landing for customers. This kind of trusted data can be difficult to monitor in the best of economic times. In our current COVID-19 world, community banks need access to dashboards that will provide the current, relevant information they need to help their employees and communities survive and thrive in this new economic landscape.

While no one can chart the exact trajectory of our economy post-COVID-19, there’s little doubt we’ll be revisiting some of the worst economic times in recent history. Lessons learned during the recession of 2007 to 2010, as well as other historic economic downturns, can prove vital as you steer your community bank into unchartered economic territory in the coming months. 

Challenge: Liquidity

Nothing will cause the failure of an institution faster than a lack of liquidity — the ability of a bank to meet the demands of its depositors. Uncertain economic times are fear-inducing for your customers, and these fears can go south very quickly.  A lack of trust in the government and in the financial system can lead customers to irrational decisions like withdrawing cash and storing it under their proverbial mattresses. 

Another outgrowth of economic uncertainty is financial hardship for your borrowers, especially if they work in industries that are temporarily closed. No money coming into their tills each day reduces their ability to make loan payments, thereby reducing cash in-flows at your institution. So just what can and what should banks be doing right now?

Tactical responses to safeguard liquidity

Here are some tips and tactics you can employ right now to calm customers' fears, shore up your bank and ensure that everyone makes it through this storm. 

  • Increase your targeted liquidity ratio to a level you and the board are more comfortable with.
  • Determine the level of “Cash and Cash Equivalents” you need on your balance sheet to achieve that target. Set an indicator on your performance management tool to alert you if this balance falls below your established parameter.
  • Monitor balance, daily, concentrating on the trend. (Is liquidity growing or shrinking with each day?)
  • Take action to correct any shortfalls before the situation becomes critical.
  • Review your contingency funding plan and revise as necessary to fit the current economic environment.
  • Test your contingency funding sources (FHLB lines, and other wholesale funding sources) more frequently to make sure they will be available when needed.
  • Identify collateral available for pledging before it becomes necessary to do so.
  • Establish and maintain open lines of communication with funding sources, the board (or designated committee) and regulators, keeping everyone up to date on your situation.
  • Educate and communicate regularly with staff.

Educate your staff and depositors on FDIC insurance coverage and how they can maximize coverage beyond $250,000 per person

Where there is a lack of communication, employees can get nervous and start to speculate. Without open communication, a larger problem could arise as your staff begins to suspect the worst. Communicate often and honestly, providing assurance that you have plans and resources in place to manage through this situation.

Challenge: The rate cut

The Fed’s rate cut and the congressional stimulus package serve to infuse liquidity into the system to stabilize and stimulate the economy. The short-term impacts to banks will likely be lower asset yields and thinner net interest margins (NIM), thus lower earnings. The good news is there will be opportunities in the coming weeks and months for banks to lower their cost of funds (COF), allowing NIMs to slowly recover.

Tactical responses to help you recover and rebuild

Here are some tactics to deal with the rate cut to make sure your bank recovers and rebuilds.

  • Begin immediately looking for opportunities to lower your cost of funds, while balancing the need for liquidity.
  • Consider cutting deposit rates, but realize that cutting deposit rates too much, too quickly can result in a loss of deposits. During the prolonged economic expansion, many banks had to pay higher rates for deposits, especially Money Market and Time Deposits to meet the increased loan demand. As a result, many banks have large blocks of time deposits maturing each month. Access a CD maturity report to analyze and understand the maturity schedule of your time deposit portfolio.
  • Look for opportunities to pay lower rates for longer terms given the extremely low-rate environment we are operating under.
  • A performance management tool, like Banker’s Dashboard, provides essential data as you look to recover and rebuild from another rate cut. Here are a few examples of how these tools help you navigate this situation: 
    • A CD repricing tool helps you to forecast the benefits of lower rates and the pace at which you can reduce your COF.
    • A loan pricing tool helps you appropriately price loans as your customers seek financial assistance to keep their businesses operating.
    • Gain insight into what is driving the changes in your NIM using a margin analysis report.
    • Measure the impact an emergency rate cut will have on your loan yields using a Prime Rate shock tool.
    • Get access to loan production and maturity data to understand which loans are having a positive or negative impact to average yields. You can also look for opportunities to reprice or insert rate floors on loans that are coming up for renewal.
  • Look for opportunities to move funds from Money Market Accounts (MMA) to time deposits to reduce the sensitivity to rising rates in the future.
  • Educate staff at all levels, from the board room to the teller line, on the value of 1 basis point in NIM.
  • Train them on the little things they can do every day to move this needle: 
    • Connect with friends over social media, virtual get-togethers or virtual neighborhood game night about moving their non-interest-bearing deposits to your bank.
    • Train those who have responsibilities for negotiating on loan and deposit rates to become better negotiators, getting every basis point possible on loans and paying the least possible for deposits.
  • Create transparency throughout the organization.
  • Educate your staff on what metrics are the most important to your institution and how what they do contributes to your success.
  • Encourage and reward new ideas from your staff.

Every economic cycle is unique, but there are certain fundamental tactics that can be employed to help your financial institution survive and even thrive, during difficult times. Pilots rely on a complex array of instruments to understand and control their aircraft. As bankers, clear visibility into your institution’s key metrics will enable quick, informed decisions that protect employees, communities and shareholders. 

The information provided in this blog does not, and is not intended to, constitute legal or financial advice.