Market Overview

While Confidence Index Falls to Historic Low, Bankers Hail New Reciprocal Deposit Legislation


While Confidence Index Falls to Historic Low, Bankers Hail New Reciprocal Deposit Legislation

PR Newswire

ARLINGTON, Va., Aug. 9, 2018 /PRNewswire/ -- Which provision of the Economic Growth, Regulatory Relief, and Consumer Protection Act is most important to bankers? When Promontory Interfinancial Network asked bankers in its latest quarterly Bank Executive Business Outlook Survey, the amendment to the Federal Deposit Insurance Act to make most reciprocal deposits nonbrokered came out on top.

The bankers were asked to rank the expected impact of various provisions of the new law on a scale of 1-5, where 5 was the most positive. The mean score was 4.04 with 37% of bank leaders assigning reciprocal deposit reform the top score of 5, higher than any other provision tested. In addition, 58% of bankers indicated that they plan to start, or expand, their use of reciprocal deposits immediately, or very soon, with another 29% willing to consider doing so in the future.

Reciprocal deposits are deposits that banks receive through a deposit placement network in return for having placed matching deposits. Exchanging deposits on a dollar for-dollar basis enables participating banks to provide their customers with access to FDIC insurance beyond $250,000.

"While the change to nonbrokered status for most reciprocal deposits helps banks of all sizes, it is particularly beneficial for community banks, and it is nice to see them embracing the provision with such enthusiasm," said Mark Jacobsen, President & CEO of Promontory Interfinancial Network. "In general, the new law should enable banks to generate more lower-cost, stable funding to support more local lending initiatives. That's good for communities across the U.S."

In addition to the reciprocal deposit provision, respondents rated the expected impact of these provisions: qualified mortgage relief for smaller banks, capital regime simplification, Volcker Rule exemption, shortened Call Report, extended exam cycle, Home Mortgage Disclosure Act exemption, and easing of capital rules for CRE loans.

The provision that drew the greatest level of indifference from respondents was the changes made to the Volcker Rule. Fifty-nine percent ranked it as "neutral," and its mean score was 2.74 out of 5. Another 17% of respondents gave this provision a 1, indicating a negative impact.

Turning to other questions, respondents' views of how overall economic conditions affected their business in the previous 12 months were largely unchanged from last quarter's report. But when looking ahead, respondents were less bullish—bankers who expect conditions to improve dropped by five percentage points, while bankers who expect conditions to deteriorate increased by six percentage points. On the metrics that make up Promontory Interfinancial Network's proprietary Bank Experience IndexSM and Bank Confidence IndexSM (access to capital, loan demand, funding costs, and deposit competition), this survey finds drops from last quarter. Both the Bank Experience Index (which looks at the preceding 12 months) and the Bank Confidence Index (which looks forward to the next 12 months) fell to their lowest levels recorded in this survey since its inception three-and-a-half years ago. Expectations relating to deposit competition and funding costs are probably driving the historic low for the Bank Confidence Index.

Regional differences on several "look-back" measures (compared to responses from Q1) are noteworthy. Community banks in the Northeast region, for example, saw a significant decline (19 percentage points) on the question of improved access to capital, while noting a spike of 19 percentage points on the question of increased loan demand and an increase of 11 percentage points on the question of funding costs. Community banks in the South also saw a double-digit (12-percentage point) decline on the question of improved access to capital, but unlike the Northeast, the South saw a 10-point decrease on the question of increased loan demand and a smaller increase (only five percentage points) on the question of funding costs.

There are some interesting variations on expectations (compared to Q1 responses) for the future as well, especially when it comes to bank size. There is a 14-point increase in the percentage of larger banks predicting a decrease in loan demand over the next 12 months and a 15-point increase in those who say overall economic conditions will worsen for their bank in that time. By contrast, smaller banks stayed relatively stable on both of these forward-looking measures.

For details and other insights, please download the latest survey report.

About the Survey
The Q2 2018 Bank Executive Business Outlook Survey was completed online over the course of two weeks from July 2-July 13, 2018, and incorporates responses from 390 unique banks as provided by CEOs, presidents, and CFOs from across the country. Compared to the asset-size distribution of the banking industry, responses were slightly weighted toward banks with between $1 billion and $10 billion in assets. The survey is the fourteenth quarterly survey published by Promontory Interfinancial Network.

About Promontory Interfinancial Network, LLC
Promontory Interfinancial Network was founded by leading figures in the banking industry—Eugene Ludwig, Alan Blinder, Mark Jacobsen, and Alfred Moses—to provide financial institutions with profit-enhancing solutions. The founders envisioned the largest bank network of its kind, whose "synthetic size" would help each member institution to compete more efficiently. More than 3,000 financial institutions have chosen to be a part of the company's Network. Network members use Promontory Interfinancial Network's balance sheet and liquidity management solutions to acquire and retain large-dollar customer relationships, purchase funding, reduce collateralization costs, and buy and sell bank assets.

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