When Liabilities Are No Longer A Liability

The trajectory of mishaps in the financial services sector has often made for gripping reading, especially with the privileged perspective of hindsight. In today’s environment of rapidly rising interest rates and unseen inflationary pressures what seems somewhat unexplainable is the lack of commentary on structural challenges on banks’ future ability to generate well-priced and reliable deposits. Many bankers have only seen an environment of low-priced liabilities as interest rates have drifted downwards and against an extremely cautious global ‘Central Bank’ policy backdrop in raising rates – even in times of potential inflationary tensions.

As the specialist treasury firm ‘Wolters Kluwer’ has pointed out ‘for many since the global financial crisis, the yield on government debt issued in many mature economies had at most a 1 to the left of the decimal point, and often a 0 or even a minus sign’.

The Pandemic

During the COVID pandemic, an unparalleled level of deposit growth occurred across developed economies irrespective of the type of deposits, where the banks had the luxury to turn away deposits – even aggressively shutting shop for new cash-rich customers. The unprecedented rise in liabilities was registered across both retail and corporate client segments. In many major economies, the key loan-to-deposit ratio fell to levels never seen before. Talk on the street was about the impact of ‘surge’ deposits and how to deal with them.

When Liabilities Are No Longer A Liability

Fast forward to today and what would be the sense in having any discussion about deposit growth initiatives?

But as the renowned singer Bob Dylan wrote in his song ‘The Times They Are A-Changin’: Central Bank’s are now seeing inflationary pressures as ‘persistent’ and less of a transitory nature. Interest rates will be going up and remaining high for the medium term.


Retail clients are anxiously searching every avenue to protect the value of their savings in the face of rampant inflation figures. High street bank’s are failing miserably to pass on incremental rate rises to their clients opening the doors for specialist fintech platforms and challenger bank’s to eat into their client’s portfolios. The shift in the deposit-gathering landscape is happening.

Corporate banking heads looking at their asset portfolios are seeing – or will see – two trends, a declining real value of their fixed income loan margins and/or negative asset growth as clients repay the variable debt to insulate themselves from further interest rate hikes. More significantly, corporate treasurers will be acutely aware of income opportunities as the bidding war for rewarding structurally cash-rich companies starts ramping up. The vocabulary of operational v excess corporate cash is back.

Across the globe, the silent liability leakage is happening – from Canada to Europe to the UK liability attrition is a fact with banking regulators confirming a shift in the graph curve – deposits are declining. Even in more solid growth economies like India preventive measures are being taken with banks issuing unprecedented levels of 2-month to 1-year certificates of deposits as funding sources contract. And to cap it all in the biggest world economy, the USA, we are told of the staggering record reduction of USD 370 billion in bank deposit levels in the last quarter. The first decline since 2018.

All of the above going on backstage – no commentary, no rattled bankers, no blogs on actions to address the phenomena now. In many respects, developments in the retail/consumer market segment are too late to change. Worried individuals are making their own informed and uninformed decisions and community and local banks are also homing in on mopping up any residual opportunities.

What can be done?

Where the game is still playing out is in the Corporate and Commercial banking space. Banks will need to look closely at the behaviours of their clients’ balances. The pandemic has highlighted to all, the need to provide strong capabilities to aid clients in managing their cash flows and working capital. Tomorrow transaction banking specialists will need to expand their treasury offering beyond established liquidity services such as sweeping and pooling. Whilst effective in building operational balances the name of the future game will be to provide differentiated deposit and investment products. New account categories with transparent risk and reward features with flexible creative pricing and duration characteristics will become table stakes. Creating innovative bundled packages of services with deposits at the core will be critical in addressing the SME market. Supporting and reporting on ESG criteria for larger customers’ investment portfolios will require enhanced ‘look-through’ capabilities.

When Liabilities Are No Longer A Liability

As the well-known transaction banking consultancy firm, Oliver Wyman, advised 10 years ago in the face of liquidity tensions in the market “The competition for corporate liquidity is rapidly heating up. Differentiation, whether in the form of strong transaction banking capabilities or tailored deposit products, is imperative to stand out from the mass of highly similar offerings. With bank funding costs rising and likely to stay high for the foreseeable future, the benefits of capturing more deposits will exceed the cost of designing and implementing a corporate deposits-gathering strategy”.

Let’s avoid the easy reflections from hindsight and apply foresight.

About The Author –

Andrew England iGTB

Andrew England

Director & Head of Strategy, iGTB Intellect, Former Senior Advisor for Transaction Banking at McKinsey Group