Growth in traditional deposit funding sources
has stagnated at many banks in recent years and has
largely failed to keep up with the growth in bank
assets. In response to these trends, banks have had
to supplement traditional funding sources with a
variety of new, but potentially less stable and more
expensive, funding instruments. In addition, banks
have had to take other significant steps, including
cutting back on their holdings of cash and securities
and selling or securitizing parts of their loan portfolio.
All of these steps are increasing the challenges
that banks face in maintaining sound and profitable
operations. From the public's standpoint, an even
more pressing concern may be whether funding
problems will keep banks from meeting the credit
needs of their customers and communities. This
article, consequently, will examine recent bank
funding trends and their effect on community
banks in the Kansas City Federal Reserve District.
A number of community bankers, in particular,
have described recent funding shortfalls as a "crisis"
in the making.1 These concerns may have eased
somewhat over the past few months in response to
weaker loan demand, falling interest rates, and
increased liquidity in the financial system. However,
many community bankers believe that funding will
be a persistent, long-term problem. In fact, a major
fear of these bankers is that funding difficulties will
eventually force them to curtail lending to small
businesses, farmers, and other local customers—
many of whom may have few other places to turn
to for their borrowing needs.
A notable portion of the bankers responding to
our 2001 Tenth District Bankers' Survey further
voiced such concerns.2 Among their specific comments
were: "The deposit base is shifting away from
community banks," "The biggest problem for our
bank is how we will fund ourselves in the future,"
and "Core deposit growth is not possible in small
communities." Furthermore, in a survey question
about the challenges bankers might face over the
next five years, over 50 percent of the bankers
thought that "maintaining and attracting retail
deposits" would be a "significant problem," and
another 35 percent felt that it would be a "moderate
Not all signs, though, indicate that funding is
such an intractable problem, and many banks may
be able to find ways to acquire the funds they need.
In fact, with the record profitability in banking over
the last five years, banks may have sufficient room
to make adjustments and implement new funding
strategies. Recent deposit trends, moreover, may be
a sign of the changing financial environment, which
is not only increasing competition among banks,
other financial institutions, and the capital markets,
but is also creating new funding instruments and
bank delivery channels.
In examining funding problems at Tenth District
banks, this article will first look at bank deposit
trends and how they have affected community banks.
Next, the article will examine several possible explanations
for these trends and their implications for
future funding patterns. The final section will explore
the options banks have for dealing with funding
shortfalls and how these choices might affect banks'
operations and ability to serve customers.
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