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This Month in Commercial Banking: The Final Countdown

It’s the final countdown. This will be our last issue of This Month In Commercial Banking prior to the March FOMC meeting, which is widely expected to mark the start of the next rising rate cycle. And as we’ve written for several months now, this cycle promises to be like none other.

Despite a fourth-quarter rebound in lending activity at the largest banks, financial institutions are headed into the cycle flush with cash and loan-to-deposit ratios that are a full 20 percentage points below prior cycle averages.

This month we tackle the implications for portfolio betas and what your rising-rate playbook requires to manage to targets and pivot when needed. We also address how regional banks can place strategic bets and leverage the power of partnerships to achieve targeted scale and compete with the nationals on the digital differentiators that are most important to clients.

Finally, the growth of ESG and sustainable finance may sometimes get crowded out by other developments, but it’s one of the biggest stories in the market. This month we address novel ways that banks can incorporate ESG factors into treasury management pricing to help customers (and the banks) achieve sustainability targets.


Rate Playbook | Digital Partnerships | ESG

Is Your Rising-Rate Playbook Ready for Prime Time?

With less than a month before the Fed is expected to start raising rates, forecasts about the pace and duration of the hike cycle vary widely and shift daily. Some forecasters have predicted this year will bring seven hikes of 25 basis points each, while others have cautioned-inflation will moderate toward the back half of the year and reduce the need for ongoing monetary tightening. Recent geopolitical developments have only increased the uncertainty as to what is in store for the remainder of 2022. Add to that the dimension of quantitative tightening and this amounts to the most nuanced and complex rate cycle many practitioners will have experienced in their professional lifetimes.

The most fundamental question bankers face in thinking about portfolio level betas is how quickly the glut of excess liquidity currently in the system will subside and the traditional demand for deposit growth will return.

Over the past two years, loan-to-deposit ratios (LDRs) have fallen dramatically. This is especially true in commercial businesses where deposits continue to grow quarter-over-quarter while loan growth remains a challenge. Median commercial LDRs have decreased from 114% pre-pandemic to 75% in 4Q21. (See Figure 1.)

We have modeled a range of potential scenarios that consider different rates of commercial loan and deposit growth as well as varying speeds of quantitative tightening. These models yield results ranging from 2023 to nearly the end of the decade. These macro scenarios will also likely vary considerably from bank to bank based on the levels of surge deposits, capital and risk appetite. The scenario that you believe will be most likely will drive the decisions you need to make about how quickly to pass through rate increases.

Bankers are feeling bullish. In the Curinos 4Q21 CDA Executive Summary, 43% of bankers surveyed predicted ECR betas in excess of 25% by the end of 2022 and 26% predicted interest-bearing deposit betas in excess of 50% by the end of the year. Another 37% expected interest-bearing betas of between 25% and 50%. (See Figure 2.)

Figure 1: Total Bank and Commercial Median Loan-to-Deposit Ratios

Source: Curinos CDA; SNL Financial

Figure 2: Expected Portfolio Betas in 2022

Source: Curinos CDA

Relative to what we observed during the first year of the prior rising-rate cycle, this outlook is significantly higher for ECRs and similar, with some slightly higher bias, for interest-bearing deposits even though bank LDRs are sitting a full 20 percentage points lower than they were at the start of the last cycle. In short, this strategy makes sense if you anticipate a very rapid normalization of bank funding needs. Under a wide range of potential alternative scenarios such as slower loan growth, less quantitative tightening, materially inverted yield curve, or a shorter and shallower rate hike cycle, however, this strategy will have meaningfully adverse impacts on net interest margin.

Given the complexity of the cycle we’re rapidly headed into, it’s more important than ever to have a comprehensive rising-rate playbook. Key elements of these playbooks include defined scenarios, top down beta targets for each scenario, client level planning and guidance for how to hit the betas from the bottom up, as well as primacy scores to inform those client level targets.

Banks also need strong governance routines covering standard rate setting, exception approvals and proactive versus reactive exception pricing in response to Fed moves. Comprehensive and scalable analytics will enable decision makers to understand the drivers of portfolio performance across growth, interest expense, ECR versus fee tradeoff, product rotation, acquisition and attrition and flow of funds.

And finally, communication is key. Commercial bankers and treasury officers on the front lines need to know the script, know their delegated authorities and know the process to respond to clients as requests come in.

There’s still time to buttress plans and build playbooks – but the window to prepare ahead of the Fed is closing rapidly.

Jing Tang ( Peter Serene (

How Small Banks can Conquer the Digital Divide

There’s little question that the largest banks have a daunting scale advantage when it comes to commercial digital investment. But the rest of the field can’t afford to cede the digital high ground. In fact, we have seen many examples of regional players that placed thoughtful bets on investments and partnerships to meet the threshold of digital table stakes. At the same time, they achieved targeted scale in specific differentiated features and functions that are most relevant to their clients.

The past two years have accelerated the pace of digital innovation and adoption, driving tremendous vertical growth within payment suites and the integration of help and support features across national and regional banks. Clients now have direct access to support built into digital channels through live chats and virtual assistants, resulting in fast and easy resolution. Digital, therefore, has become the favored method – and one that has quickly become a necessity during the pandemic. Providers need a strong connected platform that can accommodate their clients. The question: how can smaller providers scale digital innovation to grow fast and meet market demand?

Digital advancement is possible through partnerships that leverage financial technology, regardless of legacy systems. Open banking, powered by APIs, makes it possible for financial institutions of any size to access new and emerging technologies and provides the ability to scale at a faster pace in a cost-effective manner. Fintechs fill a unique space within product development and solution management, focusing on niche and emerging solutions while strengthening workflow processes that can deepen customer engagement and accelerate time to revenue.

There are third-party providers dedicated to digital advancement that provide services and tools to integrate seamlessly into core banking systems, with little lift from the bank. These services span all treasury solutions and provide the opportunity to be more agile with digital offerings, from basic account data reporting to real-time payments. Cloud infrastructures, specific to data storage, provide more efficient opportunities for data security and a win for clients as they navigate a notable user interface design and interactive dashboard. Future innovation can be leveraged from the primary partnership; open banking enables multiple fintech partnerships within the main portal.

Regional banks don’t need to compete with the largest nationals on every bit of functionality. Instead, they can take thoughtful bets to achieve targeted scale. This is especially true in the rapidly evolving digital payments arena. Payments capabilities are central to winning the primary operating account. A combination of development, partnerships and white labeling can result in leading solutions across new and emerging electronic payments types such as RTP, virtual cards and commercial Zelle that are available on desktop and mobile channels. This isn’t just a critical revenue driver, but is increasingly essential in order to remain in or atop the consideration set for primary relationships.

Jennifer Sypal (

Going Green in Treasury Management

Solutions that cater to the environmental, social and governance (ESG) movement continue to gain momentum across the financial services industry. And the financial ramifications of environmentally sustainable business practices are coming into sharper focus as institutional investors, financial sponsors and ratings agencies take increasingly rigorous approaches to ESG.

The evolving regulatory environment provides further momentum to the ESG wave. Executive Order 14057 on “Catalyzing Clean Energy Industries and Jobs Through Federal Sustainability, ” signed by President Biden at the end of 2021, creates additional incentives for major government suppliers to accelerate the transition to net zero emissions. The Curinos Treasury Strategies practice has recently observed multiple examples of competitive RFPs that ultimately turn on the relative strength of how banks respond to ESG-related questions.

The financial services industry has already created a range of products and services that enable institutions and individuals to incorporate ESG principles into their financial portfolios. In asset management, ESG AUM growth has more than doubled total AUM growth and now comprises approximately one third of all invested assets. Meanwhile, green bond issuance and ESG loan origination reached all-time highs in 2021.

Liquidity and treasury management represent the next frontier for sustainable finance. There are myriad opportunities across the working capital life cycle to help companies make more sustainable choices. These include accelerating the transition from paper to electronic payments in a way that helps customers reduce reliance on items such as paper checks, coin and currency and physical tokens. It also includes moving away from paper document processing and accelerating adoption of virtual card solutions. While they aren’t new ideas and some already are far along in the journey, these “less green” services still constitute a substantial share of the market. Paper-based services – i.e. lockbox, depository services and paper disbursements – still represent roughly 30% of gross fees, or about $6 billion annually. (See Figure 3.)

Figure 3: Gross TM Fee Distribution by Product Family

Source: Curinos CDA

Banks can help customers accelerate this shift through a combination of positive and negative incentives. As banks begin to formulate pricing events, one possibility is to incorporate ESG factors into the price-setting process, adding additional relative costs to less-sustainable services when a more sustainable alternative exists. Additionally, banks can help clients make more sustainable choices by equipping the front lines with insights into the environmental impact of alternative structures. Lastly, banks can provide a service to their customers and shareholders by systematically measuring the environmental impact of transforming their working capital management to more sustainable technologies.

Scott Musial (

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