COMMISSIONER'S C O LU M N
The Liquidity
Spectrum 2.0 Susannah Marshall | Commissioner | Arkansas State Bank Department
Y
ou may recall last quarter; my article was titled: “The Liquidity Spectrum”. Given
the notable events in early March of this year, I felt it was appropriate to continue the conversation about Liquidity and the current state of the banking industry. In the previous column, I didn’t know how timely or significant the discussion on Liquidity would become and now it seems that Liquidity will continue to dominate the headlines for our industry in the foreseeable future. There has been a series of significant responses to the current Liquidity environment. Most institutions were able to maintain ample levels of on-balance sheet Liquidity in the months following the height of the pandemic and today we are seeing Liquidity positions negatively impact some institutions. However, the need for real-time Liquidity, not just available, or contingent sources of Liquidity, can occur in an instant and it seems
certainly true of the two recent bank failures as reported by the media. Thankfully, it has been many years since our country has witnessed a true “run on deposits at an institution”. Although it appears there is some uneasiness within the system, I am optimistic that we will continue to see stability return across the sector. Bank failures are unfortunate, and the two recent Liquidity failures have been extremely alarming, particularly because of the timing of these failures occurring either mid-day or not associated with a planned regulatory closure. The responsive actions taken by the federal regulators to the events give some indication that we are in a different environment than in previous periods of banking history. I have also continued to see and hear the comments about a “banking crisis” but I do not believe that is an accurate description or appropriate language to use at this point. However, we may continue to see a period of decline, some economic
uncertainty, and the potential for further impacts to customers and our industry. The influx of money into the economy and specifically to individuals and businesses over the past two years was unique. This occurred during a prolonged period of record low interest rates and was coupled with lower levels of loan demand across the banking sector. Some banks sought alternatives other than loans to bolster income and deploy the excess funds. Although yields in the bond markets were often not the most desirable, increasing securities portfolios seemed to be the best option for many institutions. However, monetary policy changes led to rapid increases in interest rates which immediately and significantly impacted bonds prices and valuations of banks investment portfolios; thus, diminishing the value or ability to use the investments for normal liquidity needs. These negative events when coupled with certain business sectors’ need to access funds and
“The need for real-time Liquidity, not just available, or contingent sources of Liquidity, can occur in an instant and it seems certainly true of the two recent bank failures as reported by the media.” 10 • SPRING 2023
