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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.
James Harvey is a senior examiner and
economist and Kenneth Spong is a senior
economist in the Division of Supervision
and Risk Management of the Federal
Reserve Bank of Kansas City.
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