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  • Writer's pictureRyan Gilles

Control what you can control…

Now Is the Time to Do Our Homework on Deposits

One of the most common questions we get from our clients is, “What should we do about our deposits?”

It’s understandable why the question comes up so frequently. The Fed Funds rate is at its highest level in 22 years in the wake of the fastest tightening cycle in over 40 years, dramatically increasing the cost of funds throughout the industry.

Furthermore, the combination of this higher rate environment with significant deposit runoff has led to a perfect storm of both liquidity and earnings pressures for financial institutions all over this country.

As we evaluate a client’s customer base and build a game plan for handling these deposit pressures, more often than not we come back to… “controlling what you can control.”


From the Editor

So often in life, it seems when something doesn’t go according to plan, we tend to take a polar opposite approach to rectify the situation. Maybe it’s human nature to act reflexively in earnest to produce better results. Maybe it’s simply frustration!

Whatever the case, you can find numerous examples of this in business, professional sports, parenting, etc. (Literally everywhere.)

But is that 180-degree swing in action the right decision? Could it possibly be worse? Maybe there were some things that were “out of our control” and therefore were bound to occur even with our best-laid plans carefully considered.

In this month’s Bulletin, DCG Senior Consultant Ryan Gilles urges institutions to “control what you can control.” He reminds us that liquidity pressures in the industry were mounting well in advance of the banking failures of this past spring. In fact, the reality is that with 35% deposit growth attributable to the COVID-related deposit “surge,” it was fair to assume we were going to eventually experience runoff as an industry even if rates didn’t change.

Ryan asks financial institutions to develop strategies that are targeted in response to their deposit outflow, and to not lose sight of the variables that are out of their control and will continue to percolate through the industry.

Vin Clevenger, Managing Director


Setting the Stage

In a relatively short period of time, the overall deposit landscape has flipped upside down:

  • Deposit Growth: In the two-year period between the start of COVID (March 2020) and just before the FOMC’s first rate hike (March 2022), deposits at all commercial banks increased by $4.6 trillion (35% total growth, 16% compounded annually). To put this in a historical perspective, the average compounded annual growth rate of deposits for the 10Y pre-COVID period was 5.73%. Extended out to the 20Y pre-COVID period, deposits grew at a compounded annual rate of 6.91%.

  • Deposit Decline: Since the Fed embarked on this current tightening cycle in March of 2022 through the end of August 2023, deposits declined by $815 billion (-5% total growth, -3% CAGR). Making this even more challenging, loans at all commercial banks increased by $1.2 trillion in that time frame – which is why liquidity levels industry-wide have tightened notably. In 2022, year over year deposit balances declined for the first time in 48 years!

  • Deposit Migration: In addition to the overall decline in deposits, we are also seeing notable migration from NMDs into CD specials as institutions seek to manage overall costs while retaining deposit balances.

Highlighting the Challenges

Given the elements above, it’s easier to understand the types of challenges this environment poses to financial institutions.

Challenge #1: Liquidity

Placing the fallout from bank failures aside, by March 2023, liquidity pressures were already mounting on balance sheets across the industry. The combination of strong loan growth while deposits were concurrently flowing out of the system has dampened liquid asset levels.

As a result, financial institutions are utilizing more wholesale funding to fill the “hole” created by this outflow.

Challenge #2: Interest Rate Risk

In this elevated rate environment, deposits are far quicker to churn into higher rate products than lower-yielding legacy asset cashflow can be redeployed into current market rates. Further adding to that mismatch of funding and asset cash flow timing is the use of shorter-term wholesale funding that needs to be replaced daily, weekly, monthly, quarterly, etc. Additionally, the delta between short-term market rates and deposit costs is still quite wide. This could lead to residual funding cost increases regardless of whether rates move up, down, or not at all.

Challenge #3: Earnings

Despite such strong loan demand over the past year, earnings at financial institutions have come under pressure over the past 12 months as funding costs have accelerated at a far greater pace than asset yields. Marginal cost of funds analysis is an integral piece of deposit pricing decision-making as institutions must assess whether to increase rates across the board, do more targeted rate increases, or let the funds migrate into CD specials and/or replace with wholesale.

Consider the Headwinds (The Things You Can’t Control)

There will always be variables outside of any individual’s control. Here are a few.

  • Competition: Money market funds, treasury bonds, and online banks, among others. There are plenty of options for discretionary deposit balances to get a competitive rate, which is putting pressure on FIs as the cost to retain their largest balances continues to climb.

  • Government Intervention/Stimulus: While stimulus had a hand in the COVID surge in deposits, it may have also contributed to poor consumer budgeting habits. When the stimulus stopped and inflation took hold, consumers who didn’t save or budget properly drew deeper into their checking and savings accounts to fund their everyday lives.

The table below is an estimated baseline of “excess” deposits still in the system. This is calculated by taking the March 2020 deposit balance figure and multiplying it by the 10Y pre-covid compounded annual growth rate of 5.73%.

Projected Balance*

Actual Balance

Variance / Surplus













*Projected Balance is prior year’s balance multiplied by 10Y pre-COVID CAGR (5.73%)

Clearly, there are still plenty of residual surge deposits in the system – possibly up to $1.7 trillion.

We can’t lose sight of the fact that the industry experienced historic levels of deposit growth in a short period of time. Any semblance of a reversion back to historical averages means that deposits will decline before they eventually start to increase again based on historical trends.

What this means to me is that institutions can’t blame themselves for losing deposit balances in today’s environment. Instead, you must focus on being able to control what you can control to ensure you retain as much of your deposit balances as possible.

Control What You Can Control

While certainly easier said than done in this environment, the ability to control what you can control in relation to deposits requires a deep dive into your deposit base. For example, consider investigating the following analysis at your institution:

  1. Identify relationships/depositors that could be at risk. Potential criteria for this analysis may include relationships that have multiple deposit accounts currently at rates lower than the current market. These are depositors worth monitoring. Consider reaching out to proactively ensure you are meeting their needs before they opt to leave for a better rate elsewhere.

  2. Create a list of large depositors who are currently paid on the lower end of the rate scale. Often, after proactive conversation, institutions may be able to increase their rate to a lesser extent than if they were to just migrate into CD specials. While some balance sheet managers may balk at this idea of “waking up sleeping money,” it may cost more in the long run to wait and eventually receive an ultimatum.

  3. Track balance trends across all deposit types.

    • NMDs: Where is the decline? Is it predominantly in checking accounts? These outflows could be more related to inflationary impacts and may not be worth chasing to retain the balances as the money is being spent rather than moved. Is it in Savings or MMDA? These account types tend to house more discretionary funds, so it could be a function of consumers dipping into their savings or it could be that non-competitive rates compel them to move the funds elsewhere. If the latter, would you be able to retain those dollars at a reasonable cost before they migrate to higher cost products or off the balance sheet?

    • CDs: How much of the growth in CDs is from NMD migration vs. newly acquired deposits? The marginal cost of funds impact from migration can get costly, but if you are going to have some element of new growth it helps lower that marginal cost. It can also help indicate whether CDs are working as just a retention tool or as a growth tool.

In an environment as challenging as today’s, understanding your deposit base on a deeper level can help you make more informed decisions regarding the best way to navigate forward. Identifying trends to evaluate which components of the deposit base are “in your control” vs. “out of your control” may enable focus on strategies that are better tailored to your balance sheet.


For more insights from Darling Consulting Group, click here.



Ryan Gilles is a Director at Darling Consulting Group, where he enables community financial institutions throughout the country to solidify and enhance balance sheet management. In this role, he works collaboratively with executive teams and ALCO committees to help develop and implement tailor-made strategies related to interest rate risk, liquidity, and capital while prudently managing risk to optimize earnings and satisfy regulatory compliance in a constantly evolving economic and regulatory landscape.

Ryan began his career at DCG in 2013 as a financial analyst and continues to work closely with the implementation and ongoing education of DCG’s decision-support tools (Deposts360°® and Prepayments360°™) as well as onboarding and building out new client ALCO models with the New Client Implementation team. He lives in South Boston with his wife and is a graduate of Assumption University with a B.A. in accounting.


© 2023 Darling Consulting Group, Inc.


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