In 2020, as the pandemic and economic uncertainty reigned, the banking sector began to experience significant increases in liquidity. This trend was spurred by a combination of conservative financial decisions, such as consumers hoarding cash rather than borrowing, and PPP deposits.
Whether to satisfy regulators or generate returns, joining a loan market is a method of deploying excess liquidity. Read on for everything you need to know.
To discover the essential banking qualities you need to further optimize your lending strategy, check out our updated white paper, The Definitive Guide to a Modern Core Banking Partnership.
Why do so many banks have excess liquidity?
The pandemic has created a unique confluence of events that have affected the loan market. Between government stimulus initiatives and Federal Reserve actions, liquidity quickly began to rise. To quote the New York Times“Consumers and businesses have largely benefited from government stimulus efforts, which have reduced demand for credit and helped them pay down debt or hoard more cash.”
As the Federal Reserve recently explored, bank deposit growth has soared during the pandemic. While this year’s data collection is ongoing, it should be noted that national filings stood at $12.77 trillion in June 2019 and reached $17.2 trillion during the reporting period. 2021.
Additionally, many banks have taken a more conservative approach to lending, concerned about the potentially negative impact of the pandemic on jobs and businesses. And the decline in consumer credit quality, coupled with the still looming CECL transition, has forced institutions to provision for larger losses.
Many of these trends have continued into 2022, leaving banks awash with cash. As lending remains the main driver of revenue, many institutions are revising their lending strategy to generate returns for investors. These strategies include adopting digital lending systems, streamlining small business lending processes, or navigating lending markets for participation across the country.
How does a marketplace loan work?
A trusted lending market connects bankers nationwide to enable participation in lending. This creates an organized network of regional community financial institutions, third-party originators, and investors across the United States.
There is no cost to review potential loan opportunities available and you remain anonymous until you complete a transaction. It is perfect for any institution wishing to become:
- Speakers: Buyers can access key loan metrics and attributes for each transaction, including the seller’s underwriting process, in advance to help you determine what’s right for your portfolio. Once a loan, equity, or other interest opportunity is identified, the buyer submits a preliminary interest through the platform. The originator or seller reviews the request and once the NDAs are executed, the buyer or participant works together to finalize the transaction outside the market. Private personal information is not exchanged until this time and this transaction costs 25 basis points, or 0.25% of the interest rate, to buy or sell.
- Main lenders: Sellers can post participation opportunities efficiently and anonymously. Once the loan or loan portfolio is approved and published live to the market, potential participants/buyers can search, view, favorite and/or submit bids on the opportunity or any other active trade on the platform. Buyers can also define specific parameters, allowing the matching algorithm to automatically find and recommend new opportunities or financial partners that meet their unique transaction criteria, including asset type, size or geography.
Ultimately, your reasons for buying or selling are the ones you already know. Whatever the need, this technology can streamline existing procedures, help you optimally align with target relationship profiles, and generate a return on excess cash.
Use the lending markets to balance your portfolio and your credit risk
These marketplaces allow you to become partners of a kind with other banks, establish preferred loan types, and optimize quality and price by choosing from a diverse set of transaction streams. This gives a big boost to financial institutions, especially smaller communities, that want to expand their lending network beyond their geographic market and enable participation in one or more banks.
Perhaps you have merged with another institution and need to minimize the risks associated with existing credits that you inherited. Maybe you have a strong borrower and want to continue doing business with them despite reaching your loan limit. In either case, you can post the loan and determine if you want to retain the servicing rights.
Banks often struggle with a high concentration of certain asset classes that need to be offloaded. But you don’t have to rely on your immediate network. For example, a rural community bank with mostly Ag loans can easily connect with a metropolitan bank with a portfolio consisting of commercial real estate (CRE) loans.
By doing so, you can also make your institution less vulnerable to local economic downturns or sudden lending declines of certain types as we have seen during the pandemic.
Use the loan market to streamline procedures
This new technology simplifies the process of growing assets or disposing of them when lending limits or risk concentration become too high. Much like digital loan origination software, a modern loan marketplace reduces demands on internal resources and allows you to manage the transaction process through a single point rather than between multiple parties.
Even better, you can monitor your financial institution‘s performance against your peers using interactive visualizations of current call report information for all FDIC and NCUA regulated institutions. These analytics offer performance metrics, allocation, competitive analysis, and actionable insights.
Between more efficient procedures and market insights into how peers transact, this environment reduces the complexity of lending and transaction origination. It also makes your decision-making easier, so you can make the best choices for your establishment.
What’s next for the loan market?
According to Reuters, total loans had increased by 3.8% in February 2022, largely due to business loans. However, the March and June 2022 interest rate hikes will almost certainly affect loan growth going forward.
As you keep an eye on the developing landscape, an in-market loan is worth considering. It’s a new take on a traditional process, but with no entry fees, there’s virtually no downside. During this time, your institution is able to earn higher returns, expand your access to loans, and easily diversify your loan portfolio.
As you optimize your lending strategy, remember that good corporate hearts fuel advancements like digital lending services. Find out what to look for in our definitive guide.
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Simon Fisher joined CSI in August 2020 to expand CSI’s digital lending strategy. Prior to joining CSI, Simon worked as a consultant helping banks across the United States conduct baseline assessments. Simon has a fundamental understanding of industry trends by evaluating multiple platforms. Throughout his career, Simon has held many different lending roles for a community bank during his 10 year tenure, including retail, commercial and mortgage lending. Simon understands the complexity of different types of loans and strives to provide the best digital experience for loan officers as well as borrowers.