ByRajeev R. Bhaskar , Yadav K. Gopalan
Noncore funding sources have always played an important funding role for banks; however, in the last decade, reliance on them has increased.
Noncore funding sources include federal funds purchased, Federal Home Loan Bank (FHLB) advances, subordinated notes and debentures, CDs of more than $100,000 (jumbo CDs) and brokered deposits. Aside from a blip during the 2000-01 recession, reliance on these noncore funds has increased steadily at banks of all sizes over the last decade. (See Figure 1.)
As the financial services industry has evolved over the past 10 to 20 years, depositors have had the opportunity to invest in the stock market, mutual funds and money market funds. As such, there has been a shift in core deposits away from banks to these alternate investment vehicles, which have potentially higher return. Banks, meanwhile, have experienced tremendous growth in loans over the same period. To keep up, banks have turned to more nontraditional noncore sources of funds.
As a percentage of assets, noncore funds are more important to large banks than community banks. Still, the growth in noncore funding has been much faster at community banks.
All U.S. Banks
For all U.S. banks, average noncore funding as a percentage of total assets has grown by 11 percentage points over the past 12 years. The ratio was 43 percent at the end of September 2008, compared with 32 percent at the end of September 1996. For the larger U.S. banks, which are weighted heavily in all bank averages, foreign deposits make up the largest component of noncore funding, followed by other borrowed money (OBM) and jumbo CDs. Since the credit crisis began, both OBM and brokered deposits have risen sharply. Other borrowed money is a broad category and includes Federal Reserve discount window loans and FHLB advances. The growth in this category is not surprising, given deterioration in the financial sector and banks’ sudden inability to access unsecured market sources.
For all U.S. community banks—banks with $500 million or less in total assets—average noncore funding as a percentage of total assets has doubled over the period, rising from 14 percent at the end of September 1996 to 28 percent at the end of September 2008. Despite the tremendous growth, this ratio is still much lower than that of all U.S. banks. Jumbo CDs make up the bulk of this funding, followed by OBM. Like the trends at all U.S. banks, there has been a noticeable upsurge in brokered deposits and OBM since mid-2007. However, the growth in jumbo CDs has remained flat over this period.
At most Eighth District banks (mostly community banks), the noncore-funding ratio remains above that of U.S. community banks but less than that of all U.S. banks. Noncore funds as a percentage of total assets rose 12 percentage points from 21 percent in September 1996 to 33 percent in September 2008. Here, too, jumbo CDs comprise the largest component of noncore funds. Figure 2 shows the breakdown of the noncore-funding ratio by component at Eighth District banks over the past 12 years. During the past year and a half, the jumbo CD share has been decreasing while the importance of OBM and brokered deposits has been rising.
Trends at Eighth District community banks have paralleled those at U.S. community banks. In the past, the District’s community banks relied on noncore funds (as a percent of assets) slightly more than their peers did. (See Figure 1.) However, peer banks caught up over the past few quarters. The trend lines have merged: Noncore funds to total assets now stands at 28 percent for both U.S. and Eighth District community banks.
As is the case with most banks, both OBM—from the Fed and the FHLB banks—and brokered deposits have spiked during the recent credit crisis.