Each of the products of a company has varying amounts of profitability.  The same is true in a commercial bank.  The loans, deposits, trust operations, et al each have varying degrees of profitability.  In today’s marketplace, it may well be that the deposit gathering of a bank is an unprofitable, yet essential function of the bank while the loans may be highly profitable.  Therefore, when looking at the profitability of deposits and loans, how much of the profit should be assigned to the loans ...

I just returned from giving a day presentation on asset/liability management to the ABA Bank Marketing and Management School at SMU in Dallas, Texas.  I have taught at this particular school for some time and find it to be a fantastic forum for the subject. First, the students are all bank marketing personnel and I think by the nature they are involved in marketing make them very expressive in the classroom.  They are not afraid to ask questions, all of which are pertinent and to the point. Se...

I have written an article for the Federal Home Loan Bank of Seattle soon to be posted in their "What Counts" publication.  The topic is competition in loan pricing.  The intent of the article is not to eliminate the role of competion when setting the pricing on a commercial loan.  It is, however, intended to point out that there are a lot of reasons why using competiton as the sole criteria for pricing a loan may be detrimental to the profitiability of a commercial bank. Other issues such as th...

On April 17, I presented a one hour webinar for the Federal Home Loan Bank of Seattle dealing with interest rate risk management in financial institutitons.  Although I discussed briefly the directive put out by the regulators on January 6, 2010, the emphasis of the presentation was to encourage banks to begin to make more of an effort to measure their interest rate risk and not just use the information to provide the regulators to show they are going through the motions.  This subject is a foll...

On January 6th, 2010 the regulators issued a directive dealing with interest rate risk in financial institutions.  It is a reminder to those institutions to review their management the "S" component of the CAMELS rating.  What institutions should take from this directive is that given where interest rates have been over the past couple of years that many banks have possibly booked longer duration assets and funded them with short-term interest sensitive liabilities.  If indeed this is the case, ...

What is it that I'm missing here?  Let's see, the government is borrowing money in the markets at as low a rate as .01% (yes, no mistake on the decimal point) and have provided banks with funding at 8% on over $700 billion.  Now if you take the spread which is the difference at what the funding costs and what is being earned, on that amount of money the interest alone is over $55 billion per year.  Some of that money has been paid back to the government by the banks - to the detriment of the tax...

To all bankers a brokered certificate of deposit has become an issue which is a constant source of irritation.  In the eyes of the regulators it is considered to be "hot" money.  Yes, it is money received by a bank with no other relationship with the customer and yes, it may go away when it matures.  But, what makes this different than a lot of other "retail" certificates of deposit received by a bank. If you think about it, the brokered deposit received by a given bank was once considered to b...

            Along with credit risk, origination and servicing costs, the cost of funding a commercial loan is probably the least understood, and represents the highest cost in the loan pricing process.  There are many methods for determining the funding cost, anywhere from a “guesstimate” to very sophisticated techniques that when all is said and done, none are perfect.  To be perfect, the funding behind the loan needs to have exactly the same re-pricing characteristics as the loan being funded....

  In the banking industry liquidity has become the topic of the moment.  What is liquidity in banking?  Ask any banker and they will give you a different definition.  It can be anything from providing day-to-day funding for the operations of the bank to the ability to pay off the depositors if the bank is liquidated.  These two ends of the spectrum view the assets and liabilities of the bank in a very different light.  As an example, cash in a bank appears to be very liquid.  Cash is indeed liqu...

Jeff Judy, a premier advisor and instructor in credit, recently included an article in his web site www.jeffjudy.com which I wrote detailing the need for a commercial loan pricing model in financial institutions.  In Jeff’s role, he is often asked what is available in the market for assisting lenders in determining the “right” pricing on a commercial loan.  After having viewed various loan pricing models, he requested I provide the article to him to help others determine what is needed.  The art...