When we talk about unforeseen Black Swan events, the COVID-19 virus fits the profile. It has come out of nowhere, taken lives, disrupted public health, altered our daily lives, causing financial market volatility, caused more than five standard deviations of movement in interest rates and likely to have a material impact on credit markets. This isn’t business as usual and for this uncharted territory, you might find this playbook helpful.
Here is the funny thing about the tongue-brain connection - your brain can project, with a very high degree of certainty, what it will feel like if you lick any given object such as your desk, your shirt, car hood, a stucco wall, computer keyboard - you name it. This is despite the fact that you are likely to have zero experience in licking any of those objects in the past. The wiring in your brain is designed to project forward that tongue-licking feeling based on other sensory input, and it does it with amazing accuracy.
There has been substantial research on how prepayment speeds of residential mortgages affect the profitability of individual loans and portfolios. Because of the homogenous nature of residential mortgages, many firms have developed highly predictive models to calculate prepayment speeds based on past behavior, portfolio makeup, and macroeconomic variables. However, very little research is available on prepayment speeds of commercial mortgages – this is understandable because of the uniqueness of each commercial loan. Even sophisticated loan risk-adjusted return on capital (RAROC) models
We have written numerous blogs about why banks should reconsider the risk-for-yield business model when it comes to credit or interest rate risk. The return on equity (ROE) in risk-for-yield businesses is low, and the business outcomes during downturns are adverse. Instead, banks should construct an advisory business where taking risk may be just one element in delivering a customer-centric solution.
Banks that complain about not doing enough in marketing or not having a big enough budget may just not be taking the right approach. We rarely see a bank fully utilize their content. If done right, you can get at least five times the conversions for almost the same expense as you spend now. What bank wouldn’t want five times the loans, deposits, or fees? In this article, we explore our approach to content marketing and how to “Relate, Repurpose, and Recycle” and how to use the “Content Blender.”
In our last blog, we reviewed ZIRP (zero interest rate policy) strategies deployed by various central banks. We discussed how ZIRP strategies had been deemed by many economists to be ineffective over the long-term to stimulate economic growth and stoke inflation. We considered forecasts by economists, the forward interest rate market, and FOMC policy member’s future rate path expectations - all point to a low probability of decreasing interest rates. However, one loud voice has been a champion of lowering rates to zero or even negative – the President of the United States.
Last week (HERE) we looked at how deposit account tiering is used, some of the objectives that banks might employ and the effectiveness of tiering in total. As discussed last week, many banks tier without objective, without data, and without supportive marketing thus rendering the methodology worthless and possibly hurtful.
The build or buy decision should be a constant question in most bank’s decision making, and unfortunately, most banks default to the “buy.” In some cases, this is appropriate, but in many, it is not. In this article, we look at the two major overriding reasons of why your bank may want to hire and build out a development team in order to deliver a more customized banking experience to your customers. If you think your bank is too small, then read on.
One Reason To Develop Your Own Customer Interface
We are working with numerous community bankers to develop strategies for instituting floors on commercial loans. The idea of protecting floating or adjustable rate assets is not new to community bankers, but the current interest in this concept is spurred by specific and unusual communications and market developments that are worth analyzing.
Government-sponsored enterprises (GSEs) have been lending to borrowers for many decades. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) have popular multifamily lending programs so much so that they now control the bulk of the market. For example, Freddie Mac’s total multifamily finance activity for 2018 was $77.5B, and Fannie Mae’s was $65.4B which means that if you have to compete, your bank needs to do so carefully as you have a high probability of getting adversely selected.
