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When Liabilities Drive Bank Deposit Growth

 

Home / Blogs / When Liabilities Are No Longer A Liability
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When Liabilities Are No Longer A Liability

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The financial services sector has long been marked by a series of unpredictable events, often becoming clear only in hindsight. Today, with rapidly rising interest rates and mounting inflationary pressures, a critical concern has emerged: banks’ future ability to generate well-priced and reliable deposits. Many bankers, who have primarily operated in a low-interest-rate environment, are now confronting the challenges of corporate liability management and the liability products of banks as they navigate these uncharted waters.
As the financial consultancy Wolters Kluwer aptly noted, “Since the global financial crisis, government debt yields in many mature economies have rarely exceeded 1%.” In some cases, they even dipped below zero. This low-rate environment created a fertile ground for deposit growth, but the landscape is now changing dramatically.

The Pandemic's Impact on Bank Deposit Growth

The COVID-19 pandemic brought unprecedented deposit growth across developed economies, with banks experiencing an influx of retail liabilities and corporate deposits. Whether from retail clients or corporate treasurers, deposits surged as governments provided stimulus packages and consumers cut back on spending. Banks even went so far as to turn away new cash-rich customers. The deposit growth rate reached unseen levels, and loan-to-deposit ratios in major economies dropped to historic lows.

When Liabilities Drive Bank Deposit Growth

But now, with central banks signaling persistent inflationary pressures, interest rates are rising and are expected to stay elevated for the medium term. This shift is altering the dynamics of bank deposit growth.

Consequences of Pandemic on Liabilities

The consequences of the pandemic have created a new landscape in liability management for banks. Retail clients are seeking ways to protect the value of their savings amidst skyrocketing inflation, while high-street banks struggle to pass on interest rate increases. Fintech platforms and challenger banks are capitalizing on this gap, capturing market share and putting traditional banks under pressure.

On the corporate side, banking leaders are grappling with shrinking margins and negative asset growth, as corporate clients seek to repay variable debt to insulate themselves from further interest rate hikes. In response, corporate treasurers are increasingly aware of the bidding war for corporate liquidity, particularly as banks work to retain the structurally cash-rich. Corporate liability management has thus become a key focus, and the challenge is to offer attractive liability products that can transform liabilities into growth drivers.

Corporate Liability Management Post-Pandemic

Corporate liabilities have shifted dramatically post-pandemic. Banks are finding that their corporate clients, facing increased debt repayment costs, are looking to optimize cash management and liquidity strategies. To address this, banks must evolve their liability products to better serve corporate clients, offering innovative solutions such as operational cash management, sweeping, pooling, and differentiated deposit products.

Impact of bank deposit growth

Banks that succeed in offering creative and flexible liability products will be better positioned to capture and grow deposits, transforming liabilities into an asset that drives deposit growth.

Liability Products of Banks: Turning Liabilities into Assets

In the current environment, banks are tasked with developing liability products that can turn liabilities into assets. This requires a shift from traditional offerings toward more flexible and transparent products. Banks need to provide new deposit categories with innovative risk-reward features, creative pricing structures, and flexible duration options.

For corporate customers, tailored deposit products and packages are essential, with liability products designed to address the specific needs of cash-rich companies. ESG criteria have also become increasingly important, with banks expected to offer more advanced reporting and ‘look-through’ capabilities to meet larger customers' sustainability goals. By strategically addressing these needs, banks can effectively convert liabilities into deposit growth opportunities.

Deposit growth recently has been marked by significant shifts. Across major global economies, from the US to Europe, bank deposits are experiencing notable attrition. In the US, for example, bank deposits fell by $370 billion in a single quarter — the first drop since 2018. The reasons for this decline are varied, but they include tighter monetary policies, increased competition from fintech, and customers moving their funds into higher-yielding alternatives. Banks are responding by offering shorter-term certificates of deposit and other liability products designed to capture more liquidity. In emerging markets like India, preventive measures are being taken to prevent liquidity outflows, with banks issuing short-term certificates of deposit to secure funding sources in a contracting market.

Retail Liabilities in Banking: Challenges and Opportunities

Retail liabilities in banking are also facing a transformation. With inflation eroding the value of savings, retail customers are becoming more selective in where they place their money. Banks are being outpaced by fintech companies that offer higher returns and more agile services. This shift poses both a challenge and an opportunity for traditional banks.

To remain competitive, banks must rethink their approach to retail liabilities, offering more attractive interest rates and a broader range of liability products. While the immediate opportunities for retail deposit growth may be shrinking, banks that can differentiate themselves through innovation and tailored offerings still have the potential to capture and retain retail liabilities.

Understanding Bank Deposit Growth Rates

As banks navigate the evolving landscape of liabilities and deposits, understanding bank deposit growth rates has become more critical than ever. Deposit growth is no longer guaranteed, as customers—both retail and corporate—are more discerning in their deposit decisions. The pandemic highlighted the need for banks to innovate and provide strong treasury capabilities to aid clients in managing cash flow and working capital effectively.

To drive bank deposit growth, banks must focus on providing differentiated deposit products, enhanced transaction banking capabilities, and transparent risk-reward structures. By doing so, they can compete effectively in a market that increasingly favors innovation and flexibility.

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