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Increasing Deposit Costs and Liquidity Pressure for Retail Banks

Posted by PriceBeam on May 24, 2017

pricing retail banks

Many financial institutions are starting to experience a stronger loan growth, which has caught the media's attention. The media is increasingly reporting future expectations of loan interest rate hikes, and consequently, depositors are now demanding higher interest rates. A recent report by Darling Consulting Group concluded that it was only a matter of time before banks' deposit costs would increase.
Meanwhile, banks report relatively low liquidity ratios well below the 20% regulatory benchmark, a ratio that is expected to decrease even further as a result of the currently low deposit rates and increasing loan growth.
To address the low liquidity ratios, banks essentially need to generate more funds that are not reinvested into (the increasing number of) loans. As deposit costs increase, net interest margins are consequently expected to get lower, and thus, it will become increasingly harder to increase liquid assets with the earnings from loan activity. 

We previously argued that banks need to look for alternative revenue sources, and this can be a great way for banks to address to low liquidity ratios. Here's a list of suggestions for alternative revenue sources that can do just this.

 

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Written by PriceBeam

PriceBeam
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