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Deposit Networks, Funding Diversification, and Managing Excess Cash
March 28, 2023 | ModernFi Insights
In previous newsletters, we discussed the diversity of funding models as well as the diversity of business models. Given the recent events at Silicon Valley Bank (SVB), we think it makes sense to revisit these topics and discuss how deposit networks benefit participating banks.
SVB’s funding and business models were each highly concentrated in the tech sector. This led to a lack of diversification in their deposit base and a large amount of uninsured deposits. Deposit networks allow participating banks to raise new, insured deposits, and modern networks like ModernFi allow banks to have them on balance sheet the same day. These deposits do not come from the same sources as the bank’s pre-existing accounts, increasing diversity and stability of their funding.
Traditional funding sources tend to be quite slow, which left SVB with very few alternatives when they needed to raise money quickly and survive a bank run. The alternatives that were available via the Fed or FHLB required collateral, and the deadlines hit before the securities could get fully priced and processed (Wall Street Journal).
Deposit networks also benefit banks that find themselves holding on to excess deposits. Rather than invest cash in long-dated fixed-rate bonds, increasing exposure to interest rate risk, banks can sweep the deposits off balance sheet. The bank maintains the relationship with the customer and can control balance sheet size, but no longer holds the actual funds. If these banks find themselves in need of cash, they simply need to reduce the amount they choose to sweep, and the funds will come back to them (same day or next day in the case of ModernFi).
Although it is purely speculation on our part, it makes sense to assume that bank examiners will emphasize funding models in the aftermath of SVB. If they have not already done so, bank management teams should explore all available options.
Bennett and the ModernFi Team
Bennett Johnsen is the Chief Compliance Officer and a member of the Founding Team of ModernFi, where he is responsible for regulatory compliance and bank due diligence. Prior to joining ModernFi, Bennett was the Chief Financial Officer of Texas Exchange Bank, where he grew the bank from $675mm to $2.5bn in assets utilizing a range of deposit and funding channels. He also developed and maintained the bank’s policies and procedures, dealt with regulatory audits and examinations, and was chairman of the bank's asset-liability management committee, where he was responsible for balance sheet and liquidity management. Prior to being named CFO, he was the Chief Credit Officer at TEB. Bennett previously worked in institutional sales at Comerica Bank and in structured finance at MMC Securities. He graduated from Princeton University with a BA in Economics.
Change from three weeks ago
Sources: FHLB Advances are an average of FHLB Boston, FHLB Chicago, and FHLB Des Moines. Brokered CDs are an average of Fidelity and Vanguard. Listed CDs provided by National CD Rateline. US Treasurys and LIBOR provided by WSJ. SOFR provided by CME.