The banking industry faces an urgent issue: many banks are finding it difficult to expand credit due to slow deposit growth. Typically, raising deposit rates to attract more deposits, especially wholesale deposits, is a common solution. However, current regulations make wholesale deposits less attractive because they significantly impact the liquidity coverage ratio (LCR).
Essentially, for every $100 of wholesale deposits absorbed, banks must hold nearly $50 in high-quality liquid assets (HQLA) to maintain an LCR of around 120%, making these deposits costly and unattractive.
Bernstein points out that this regulatory framework has led to slow deposit growth, particularly during periods when household deposits are already weak. To alleviate this issue, they suggest a potential adjustment: lowering the runoff rate for wholesale deposits.
Currently, this rate ranges from 40% to 100%, while retail deposits range from just 3% to 10%. Lowering this rate would make wholesale deposits more attractive and significantly boost deposit growth, even if banks need to offer higher interest rates.
A mere 10 percentage point reduction in the runoff rate could improve the LCR ratio by around 20 percentage points, bringing substantial improvements. Although the likelihood of the central bank broadly lowering the runoff rate is slim, even narrowing the gap between wholesale and retail deposit runoff rates would be a big win for banks. This would enable them to attract more wholesale deposits without increasing the current LCR burden.
Bernstein also proposes other alternatives if adjusting the runoff rate is not feasible. These include redefining HQLA assets, redefining wholesale deposits, shortening the LCR estimation period, and enhancing the use of liquidity buffers.
