Who Needs More Checking Accounts?

The entire industry is flush with liquidity. With few notable exceptions, banks loan-to-deposit ratios plummeted like a rock in the past 18 months, as money floods our system from a thankless stock market and a no-yield money market funds, which shrunk by about 1/3 these past months.

At the same time, there is nowhere to invest the liquidity. Loan demand is slack at best, and non-treasury securities offer minimal yields and high perceived risk.

So, what's a CFO to do? Every dollar of liquidity curtails short term earnings in many banks. Yet even after rationalizing CD rates and some premium money market accounts, money keeps flowing in with nowhere to go. One of the main questions at our Forums is: What can we do with all this liquidity?

My answer isn't for the faint of heart. It is: go after those checking accounts with vigor and vengeance. Sacrifice short term earnings for long-term franchise value and true strategic thinking. As we (and investors) evaluate our respective franchises, interest free checking deposits top the value list. Not only are they typically hugely profitable (during those times when yield curves actually curve and their absolute levels aren't near zero), but they are very difficult to duplicate (unlike high yield CDs, mortgage back securities or shared national credits, for example). Plus, customers identify their primary financial institution by where they keep their checking account. And last, the opportunities to build on this foundation are broad, while other accounts (say CD or an auto loan) are far more limited.

Revamping your checking account product line is a challenge you must face with the advent of Reg E and the Consumer Financial Protection Agency, with or without Elizabeth Warren. The profitability of those accounts needs a closer look and a sharper pencil as fee income will continue to be curtailed. At the same time, those customers who have adopted overdrafting as a way of life and financial management aren't going away, and we, as their banks, need to meet their needs. Offering customers, both commercial and retail, more choices is what this new era will bring.

Whichever way you reshape your checking account product suite, one thing remains constant: non-interest bearing checking accounts are the most beautiful - and highly valued - product we have.

While you're at it:

o Invest in building a fortress balance sheet,

o Change your loan mix to include more sophisticated, higher yielding assets,

o Shore up your loan administration groups to ensure effective collections, documentation and workouts

o Beef up your treasury management staff to better care for your small business and commercial customers,

o Build a scalable operating model and infrastructure to facilitate effective acquisition integration,

o Assess acquisition opportunities, both with and without the FDIC, and be ready to bid quickly and economically, and

o Conduct an expense controls review with special emphasis on transaction staff at the branches
The real question we face is the tradeoff between long term earnings and capital appreciation vs. current income. These days strong capital and solid asset quality are far more valuable than current income. Take advantage of the market's all too temporary tolerance and invest in the future. Your earnings, access to capital and stock price will all benefit from this investment.