IBA’s Washington DC Update for Sept. 8, 2021

IBA’s Washington DC Update for July 30, 2021

Idaho Banks Receive $7,360 in Distributions from American Bankers Mutual Insurance, Ltd. $91.3 million has been declared in total distributions since 1991.

Protection Against ATM Thefts

Tactics for Navigating Tectonic Shifts in Liquidity

Scott Hildenbrand
Managing Director
Head of Balance Sheet Analysis and Strategy
Head of Piper Sandler Hedging Services

This year has presented bank management teams with a multitude of issues to juggle, many of which seemingly pull in opposing directions, and most of which were not firmly on the radar to start the year. Such is life in 2020. Some banks’ primary concerns stem from the fact that the industry has seen a shift in liquidity. Balance sheets are awash with deposits relative to recent periods while securities holdings have come down relative to assets. The build in balance sheet liquidity has come in the form of cash, with an unusually high 7.6% of assets held in cash and equivalents as of June 30.

This drastic change in the liquidity picture is best encapsulated by the significant uptick in the Cash and Unencumbered Securities-to-Assets Ratio. The ratio has surpassed the average over the past fourteen years of 20.6%, steadily climbing toward the high of 24.7% last seen in 1Q13. Source: S&P Financial, Banks and thrifts with assets between $250 million and $25 billion

While every institution is unique, many banks have responded to the shift in liquidity by asking two questions: how does this affect the asset side, and what are the options on the liability side? On the asset side, management teams wonder what to do with excess cash in a world where most bond yields are disappointingly low. Even though liquidity profiles appear strong and are trending stronger, economic uncertainty creates unpredictability in depositor behavior.

As such, some institutions feel more comfortable with investments that maintain maximum flexibility in the future – sale-ability and pledge-ability – with lower yield as a tradeoff. Other institutions have looked to extend their investment portfolios further out on the curve to increase yield, while mitigating tail risk by match funding with 5 + year structures at historically low rates. For instance, banks have worked with some firms to utilize their inexpensive, longer-dated funding mechanisms at attractive rates.

Many corners of the banking industry are concerned that low rates, slower loan origination, and excess liquidity trends are here to stay for the foreseeable future, and have begun the search for loan surrogates. Allowing these banks to extend the duration of their liability portfolio, at a scalable level, opens the door to more asset purchase strategies. We have seen two specific asset strategies gain momentum: exploring community and regional bank subordinated debt as an investment option, and analyzing how to invest in municipals without ruining their interest rate plan. As an alternative to extending the liability portfolio, some institutions have swapped fixed rate municipals to floating, thus obtaining an attractive yield with reduced duration risk, and protecting Tangible Common Equity. Exploring risk/reward profiles of earning assets is nothing new to balance sheet managers, but the environment has certainly evolved since the start of 2020.

Managing excess liquidity while planning for interest rate risk management has also become slightly more complicated on the liability side. How does a bank choose from the various funding options and hedging strategies available? The decision-making process must take into account balance sheet composition (i.e. the availability of liabilities to hedge), impact to earnings and capital (in addition to liquidity) from the strategy, and practical applications, such as hedge accounting.

For accounting simplicity and hedging flexibility, it’s generally recommended to first evaluate liability hedges when attempting a shift in interest rate risk profile. In fact, many institutions took advantage of both spot-starting and forward-starting cash flow hedges over the past year. Forward-starting swaps on forecasted borrowings allow the bank to purchase longer duration assets today and know they will maintain the attractive spread in the future. For example, offerings like IntraFi Network’s (formerly Promontory Interfinancial Network) IntraFi Network Deposits give banks the ability to launch these funding contracts 6 months to 1 year in the future, while locking in their rate now to hedge against any increase in funding costs prior to launch date. This allows the bank maximum flexibility in planning its liquidity now and well into the future.

But what about banks flush with liquidity with no future funding needs anticipated? Part of the answer arose from a surprising place: dealing with yet another source of stress—the LIBOR transition. The FASB released ASC 848 Reference Rate Reform in March 2020 to address potential concerns about the impact of the upcoming LIBOR transition on hedge accounting. Although LIBOR fallback is expected at year-end 2021, guidance is applicable immediately to help users today explore potential alternative contracts and rates. The guidance allows for the swap to be amended, switching to a non-LIBOR benchmark. When combined with broadly-written hedge designation memos, banks can be proactive in dealing with LIBOR cessation and even potentially identify a new hedged exposure, if the hedge documentation allows for it. The bank can then modify the hedge to match the new (non-LIBOR) exposure, adjusting the fixed-rate or adding a floating rate spread to keep the transaction NPV-neutral. Finally, the bank can amend their hedging memo to reflect the new exposure, and the hedge relationship continues without de-designation.

There is a positive balance sheet strategy development that comes from this combination. By allowing banks to consider a change to a non-LIBOR hedged item, the strategy essentially provides added flexibility to banks that have implemented strategies using wholesale funding paired with swaps, a strategy that many banks smartly continue to explore. The strategy allows those banks to consider replacing the existing funding with other sources for cheaper and more customizable wholesale borrowings or even deposit products, without any impact to hedge accounting. These products allow a bank to replicate the details of the previous funding instruments, but at a considerably discounted cost. As a result of having written flexible hedge inception packages, banks can change the hedged exposure from wholesale funding to deposits without a re-designation event, allowing the bank to pay down wholesale borrowings. For those banks that now have many more deposits than when they first implemented the strategy, reducing their current need for wholesale funding, this is a welcome change in funding source that maintains the interest rate protection they continue to need.

This rule can be applied in a variety of different ways. Banks can make changes to the interest rate index, the spread to that index, the reset period, pay frequency, business day conventions, payment and reset dates, the strike price of an existing option, the repricing calculation, and may even add an interest rate cap or floor that is out-of-the-money on a spot basis. On the other hand, there are some aspects of the hedge that are unrelated to the reference rate reform: an institution cannot effect a change to the notional amount, maturity date, change from an interest rate to a stated fixed rate, or add a variable unrelated to LIBOR.

Ultimately, none of these options singlehandedly solve the problem of too much liquidity with too few safe places to deploy them, while earning an attractive yield and protecting against the eventuality of rising rates. Similar to life in 2020, the key is to deploy a variety of creative tactics to weather the storm and emerge a stronger institution.



Scott Anderson is on track to lead the nation’s banking industry association in 2021

BOISE, Idaho; Oct. 21, 2020 — Zions Bank President and CEO Scott Anderson was elected chairman-elect of the American Bankers Association during its annual convention Oct. 20. He will serve a one-year term among the ABA’s officers and is expected to be elected chairman of the ABA in 2021. The industry organization representing thousands of banks of all sizes across the U.S. that employ more than 2 million people.

Over the course of his 46 years in the financial services industry, Anderson has gained a keen understanding of banking industry issues as well as the needs of consumers and businesses.

As a past member of the American Bankers Association’s Communication Committee, Anderson encouraged the organization to empower member banks with tools to better communicate smart financial tips with consumers. He is an enthusiastic proponent of the ABA’s current #BanksNeverAskThat anti-phishing campaign, launched Oct. 1 as part of cybersecurity awareness month. The campaign is the largest consumer protection initiative in ABA’s history, with nearly 1,500 banks participating.

Anderson has also served as a member of the ABA’s Government Relations Committee and as a member of the Senior Advisors Group to the President’s Council on Year 2000 Conversion in Washington, D.C.

Anderson is committed to financial education and the role bankers play in helping the public become smart consumers. In 1997, the ABA’s Education Foundation launched an outreach effort called National Teach Children to Save Day. With only a few exceptions over two decades, he has personally taken time out of his day running the bank to visit school students and teach them financial ABCs. He has motivated his employees to get out into classrooms and teach as many K-12 students as possible, totaling more than 186,300 students in Idaho and Utah since 2002. Likewise, he has encouraged his employees to volunteer for the ABA’s National Get Smart About Credit Day each October since it began in 2003, mobilizing bankers to teach more than 42,600 high school students the perks and pitfalls of credit cards.

Anderson served as chairman of the Utah Bankers Association from 2002 to 2003 and was recognized as the UBA’s Distinguished Banker by our organization in 2010.

About the American Bankers Association

The American Bankers Association is the voice of the nation’s $21.1 trillion banking industry, which is composed of small, regional and large banks that together employ more than 2 million people, safeguard $17 trillion in deposits and extend nearly $11 trillion in loans.

About Zions Bank

Zions Bank, a division of Zions Bancorporation, N.A. Member FDIC, operates 25 branches in Idaho and 98 branches in Utah and Wyoming. In addition to offering a wide range of traditional banking services, Zions Bank is also a leader in small business lending and has ranked as the No. 1 lender of U.S. Small Business Administration 7(a) loans in Idaho for the past 18 consecutive years. Founded in 1873, Zions Bank has been serving the communities of the Intermountain West for more than 145 years. Additional information is available at www.zionsbank.com

Speak up to Support PPP Forgiveness Standalone Bill

Advocacy Opportunity –

Congress seems to be at an impasse for now on a coronavirus relief bill, so we’re asking IBA members to engage with your member of Congress to support a standalone bill to streamline PPP forgiveness. There are bills in the House and Senate for consideration,

H.R. 7777 and S.4117. The bipartisan bills would provide a streamlined forgiveness process for borrowers that received loans of $150,000 or less.

Here’s an easy way to contact Idaho’s Congressional Delegation.

2020 Five State Virtual Banker Convention!

Many state banking associations chose to cancel their annual conventions but not us!

We are excited to invite you to join us VIRTUALLY for our 2020 convention.


The 2020 Virtual Convention, hosted by the Idaho, Oregon, Nevada, Utah, and Washington Bankers Association, includes two days of interactive and engaging sessions, designed for bankers of all levels.

This year’s event includes a keynote address by FDIC Chair Jelena McWilliams, followed by a fireside chat with ABA Chair and Sound Community Bank President & CEO Laurie Stewart. Rob Nichols, president & CEO of the American Bankers Association, will provide an update from Washington D.C. and leadership specialist Cindy Solomon will look at courageous leadership during difficult times. Robert Gates, former U.S. Secretary of Defense from 2006 to 2011, will close out the event on August 6. As someone who served under both President George W. Bush and President Barack Obama, Gates will share his perspective on current world events and how the U.S. fits into the global picture.

We invite you to join us, as well as bankers from throughout five Western states, to engage and network during the event. Learn about the latest the industry has to offer in the tradeshow, full of local companies ready to solve your banking challenges.

We can’t wait to see you this August!

*Registration for the 2020 Virtual Convention hosted by the Idaho, Oregon, Nevada, Utah, and Washington Bankers Associations is dependent upon executive approval. The registrant’s organization will be invoiced following the first registration from that institution.

For general convention questions contact Jeni Hall at jhall@idahobankers.org or (208) 506-7046.