Banks and credit unions should be preparing themselves now for the challenging economic environment ahead. Unlike 2008, this potential recession will be radically different due to the increased supply of cash, rising inflation and interest rates, job openings, and wage inflation. Yet, banks and credit unions can’t afford to make the same mistakes. White Clay outlines three ways financial institutions can rise above challenges, remain resilient, and deliver client and shareholder value.

• Build and execute a deposit pricing strategy. For the past 14 years deposit rates have been close to zero. Financial institutions’ pricing strategies have been focused on loans and fees, but the environment has since changed. Pandemic stimulus has grown deposits at commercial banks by $4.8 trillion dollars from March of 2020 to June 2022, yet $3.5 trillion (72%) of this growth has been in non-interest deposits. As a result of the significant increase in the supply of cash, inflation has increased to historic levels. To reduce inflation, the Federal Reserve has increased their overnight target rate from .25% to 4.00%. The forecast is for this rate to approach 5.00% in 2023. A significant portion of the $3.5 trillion in non-interest deposits (currently viewed as core deposits) will transition to high-interest products (non-core deposits) or decline due to the end of stimulus spending. The combination of these events requires financial institutions to create and execute a deposit strategy optimal for their institution.

The deposit strategy should include four elements:

1. Identify where clients have deposits in excess of their 3-6X monthly spending.
2. Create an institution deposit strategy in alignment with the Asset and Liability strategy optimized for their institution.
3. Implement a disciplined intentional deposit pricing process and tools optimized by client segment and relationship characteristics to price deposits according to the institutions’ pricing strategy. The process should include measurement, inspection, and coaching.
4. Educate and develop your teams to understand, execute and communicate the deposit pricing tactics effectively with your clients and internally.

Remember, you should still focus on effective loan origination. Your clients will need access to credit to successfully navigate the economic difficulties ahead. Ensure the loans and lines you are generating are priced appropriately to cover your liquidity, capital, and risk costs to deliver shareholder value. 

• Leverage modern technology. Banks and credit unions need to start with a clean data environment. Technology can combine, standardize, and curate disparate data to create a single source of truth, meaning every employee at every level of the institution can access a holistic view of their customers’ banking relationship. Advanced intelligence can determine profitability, client behaviour, and how to deepen each relationship to optimally price and deliver solutions to the client.  

These advanced metrics also reveal how clients impact liquidity, consume capital, impact risk, and provide revenue. Equipped with these insights, banks and credit unions can create strategies to optimize client relationships and offer only the most relevant products and services. Knowing which clients are the most profitable, as well as how to expand other relationships, will be especially critical during the coming recession.

• Optimize capital. Not only can intelligence be used to optimize client relationships, but it can also track performance at an organizational level. With technology, a bank or credit union can evaluate the performance of teams, as well as products and services, to better align business and sales goals. Those employees who have a deeper understanding of which products and services are most beneficial will be able to deliver value back to both clients and shareholders. This organization-wide strategic alignment is required to execute any recession strategy.

Financial institutions should be thinking about how they will be preparing and executing their recession strategy now. Those who are proactive about these strategies will be better positioned to withstand the impacts of economic downfall and future-proof their organizations.