In S&P's Capital IQ, Todd Cuppia explains how the increase in deposits on bank balance sheets creates an incentive
S&P Capital IQ
"The increase in deposits creates an increased necessity to think about [investing] as an alternative because the more that the cash on your balance sheet grows, the more you have a profit incentive to do something with that cash as opposed to just leaving it at the Fed," said Todd Cuppia, a managing director at Chatham Financial
Some banks have said the persistent strength in deposit inflows has led them to rethink how aggressively to boost securities portfolios.
"The increase in deposits creates an increased necessity to think about [investing] as an alternative because the more that the cash on your balance sheet grows, the more you have a profit incentive to do something with that cash as opposed to just leaving it at the Fed," said Todd Cuppia, a managing director at Chatham Financial who leads the firm's balance sheet risk management practice. "The banking industry in general will have to think about how comfortable it is going out on the yield curve, whether that's in the bond portfolio or in the loan portfolio."
Cuppia said that banks have to be prepared for potentially abrupt shifts in interest rates and liquidity conditions. Many are pursuing hedging strategies such as pairing long-dated bond purchases with swaps that exchange fixed-rate payments for floating rates, kicking in after two years.
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