Bridging Today’s Loan and Deposit Mismatch



“Where banks fit into the new world of lending”, The latest BAI Executive Report identifies new opportunities for banks and credit unions as mortgage refinancing loses momentum.

Several rounds of stimulating the pandemic over the past year, among other things, have helped create an unusually poor match between bank deposits and lending activity.

So many people have amassed such large chunks of their federal checks that the personal savings rate has skyrocketed to the highest levels in history. According to the Federal Reserve Bank of St. Louis, the monthly savings rate has averaged 18 percent of disposable income since March 2020. By comparison, before the pandemic, the savings rate was in low double digits in just three separate months since 1985.

At the same time, deposits hit record highs and lending fell to record lows in some categories, including residential and commercial loans as a percentage of bank assets. Mortgage refinancing fell sharply in 2021. The loan-to-deposit ratio for banks in the first quarter of this year was below 60 percent, which helped further reduce the NIM.

A vaccine-assisted recovery could begin to reverse many of these trends, and could also push interest rates higher. In this executive report we’re looking at where some lending opportunities might open up in an improving macro environment.

In our lead article, writer Ed Lawler tells us that many of these opportunities seem to be slowly evolving in 2021. The aforementioned abundance of cash is certainly a factor, and we have yet to see what will counter the slump in mortgage lending. the refinancing that has spurred so much activity over the past few years.

New mortgages should partly fill this void as the pandemic sparked a home buying frenzy that swallowed up already depleted housing stocks in a short time. Market watchers tell Lawler that certain areas of commercial real estate can also be fruitful.

But banks and credit unions are also seeing increased competition in lending, including from fintech companies whose algorithms have successfully disbursed loans under the Payroll Protection Program, an area where many traditional institutions have struggled.

Another product that may have potential at this extraordinary time is a personal loan. Stephanie Williams of Harland Clarke notes in her article that personal loans were the fastest growing part of the consumer debt area, and account balances have tripled over the past decade.

Fintech companies are firmly entrenched in the retail lending market, and peer-to-peer lending is also growing. But banks and credit unions have room for a broader presence, Williams writes, first by better using their data to identify likely loan candidates, and then by providing proper customer service.

The growing ranks of non-bank lenders also include many tech firms, including the big pests of AAA: Apple, Alphabet (Google), and Amazon. Given their financial weight and the history of revolutionizing entire industries, it should come as no surprise that, by one estimate, 80 percent of financial service providers are worried about their future prospects.

Our article by writer Don Votapka says getting nervous is a good start: banks and credit unions must first realize and accept that the disruptors are here to stay, and more importantly, they are gaining ground. After that comes the battle plan.

She writes that the best technology should be at the heart of this plan. “Providing an end-to-end digital lending solution should be a top priority for every local bank and credit union,” suggests one of her expert sources. Another responsibility is finding profitable customer segments with personalized offers.

Here are a few highlights from other articles in this Executive Report:

  • I interview Brad McConnell of Allies for Community Business in Chicago about how his organization has moved away from the credit scoring code and is going its own way in assessing repayment risk for its small business clients in low-income West and South side regions.
  • Greg Kanevski of ServiceNow tells us how to use technology to optimize lending and give teams in the enterprise and borrowers a clearer understanding of the process at every stage. The result, he says, is more satisfied customers and higher profitability.
  • And JJ Slig of Total Expert writes about how to improve CX in such a way as to create a SUPER (yes, that’s an acronym) fans that attract more customers. This deepens the relationship with banks, including lending, which increases the bottom line.

Terry Badger, CFA, is the managing editor at BAI

Download “Where banks fit into the new world of lending”, latest BAI Executive Report.


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