Bank liquidity and funding flexibility vital in current deposit landscape

A version of this article first appeared in the April BAI Executive Report: Growing quality deposits and customer acquisition. In the report, you’ll find content tackling deposit behavior trends, tech-enabled deposit growth strategies, liquidity and funding flexibility, plus more.

If forecasting the deposit landscape was ever straightforward and predictable, it’s certainly not these days.

For starters, the Federal Reserve’s charted course of action for rate cuts has been modified already and may be again. Regardless of how fast the Fed moves, customers have gotten used to chasing rates and may be slow to adjust their expectations. Plus, the durability of their economic optimism, at least in the short term, is tested by uncertain headlines. That’s especially true for business deposits, which BAI’s Isio Nelson flagged in a recent podcast interview that’s included in this report.

And then there are structural changes to a dynamic financial services industry. The regulatory climate is likely changing and arguably opening up the industry in some ways. Traditional banks and credit unions face ongoing competition from neobanks and alternative financial services platforms. And digital and technological shifts lay bare the differences even between two banks in the same market with ever-faster speed. The banking preferences of younger generations will come into sharper focus as part of a historic wealth transfer only in its earliest stages, as we explore in a feature also in this report.

All this to say, the deposit cycles that once stretched out for years now tend to change quarterly and sometimes within months. Banking leaders must remain attuned to changes to act with flexibility to balance their liquidity and funding needs and still meet retail customer and business client demands. Deposit-focused professionals need to consider these factors because the speed at which change will occur won’t be slowing anytime soon. And the deposit line of business must function alongside strategic expansion shaped by digital offerings, assuring customer personalization, mitigating omnipresent fraud risks and more.

The industry made it clear that acquiring new customers and growing quality deposits are the top business challenges in 2025, and likely beyond. That emphasis emerged in the 2025 ProSight Banking Outlook (formerly the BAI Banking Outlook) and we explored what this means for bank decisioning around marketing and promotions, as well as liquidity and funding expectations, in a previous BAI Executive Report covering top predictions for 2025.

So, we ask again, how can banks and credit unions stay true to this core aspect of the business in ever-smarter ways?

Susan Cosgrove is CEO of R&T Deposit Solutions, a position she added in January to her role as Executive Chairperson. Cosgrove, a long-time, respected leader in financial services with expertise in financial and business management, strategic modernization and optimization and liquidity risk management, talked with BAI from the vantage point of a partner to traditional financial institutions of all sizes that are operating in what is essentially a new normal.

For sure, banking risks by definition may seem as familiar as always. But in an interlocked digital world and a highly competitive marketplace, amid residual memories of high-profile failures, and juggling change in Washington and other factors, a near- constant hand on the tiller is demanded at banks today.

BAI asked Cosgrove to share a few thoughts. Answers have been edited for length and clarity.

BAI: I guess let’s start with essentially “current events,” which maybe drives home the point of market volatility. At least one go-to deposit liquidity option, the Fed’s Bank Term Funding Program (BTFP), which was around for about two years and created in response to the regional banking closures, ended in early March. What impact does that have? 

Cosgrove: So that program offered one-year loans to depository institutions using high-quality collateral. It was always intended to be temporary, but it does go away while other factors challenge the banking landscape. Namely, the Fed is pausing further rate cuts for now amid increased economic and market volatility.

Since the Fed has already reduced rates by 100 basis points, the Interest on Reserve Balances (IORB), or the rate the Fed pays banks to hold reserves, is at 4.40%. This rate was creating a negative spread for many institutions that had previously relied on BTFP funding and some institutions looked to have preemptively paid down these loans ahead of the program’s expiration.

With BTFP no longer an option, banks may need to tap alternative funding such as the discount window, the Federal Home Loan Bank, or the repo market – all of which require collateral, or they may look to third-party partners for stable non-collateralized funding solutions tied to the effective federal funds.

Regardless of the source, there is pressure on to optimize balance sheets while maintaining flexibility.

Talk about how changes to financial services to be more digital, responsive, meet more customers where they transact may add to the need to be highly flexible with liquidity and funding.

I think what’s most interesting about the digital versus traditional banking space is how fast it’s evolving. And it’s not just similar to other innovation, right? The banking ecosystem is supporting different customer segments with unique needs, right? User-friendly banking is allowing financial institutions to offer a highly customized mix of services: robo advice, payment processing, expense management, it runs the gamut. It also creates a challenge for banks to have to compete in every single service offering, particularly smaller banks that just don’t have the wherewithal to do that or the strategic desire to do it.

General speaking, with more choices comes more complexity and risk. And therein lies the warning. Any service provider that banks engage with to support this new ecosystem, essentially third-party risk, has to maintain a risk-first approach.

We have clients of all sizes. But we, as a liquidity partner, sort of level the playing field, right? Because when you’re a smaller banking institution, for example, and there’s a flight-to-safety, the level of your insured deposits matters. And if you’re a community bank, a regional bank, you may not have the ability to increase the level of insurance that you’re providing to your customers, or the percentage of insurance deposits related to your total deposit base. But we believe in a market where any bank has the opportunity to offer the safety and soundness of a competitor of any size.

What’s your high-level view for the deposit and interest-rate landscape for 2025?

There’s a lot going on this year, and I’ll kind of give you sort of a little bit of a walk through history and then into the future, on deposits specifically. We’re in a new phase of the interest-rate cycle and the markets were signaling that the Fed may have started reducing a little too early. There’s going to be a reset with respect to commercial real estate. So if you think about a five-year term before a loan resets, so 2020 to 2025, there’s about 400 basis points difference of interest rates in that period. And the reset happens this year. And then you layer in all the macroeconomic, political and geopolitical uncertainty, that’s quite the backdrop.

So now let’s talk about deposits. Going back to 2020 and 2021 and the pandemic, we saw money flowing from stimulus payments, government grants and more, plus households weren’t really spending money, and so double-digit deposit growth. By 2022, deposits had normalized back down to more of a 3%-4% kind of level, so I would argue that was good. And in 2023, it shifted again. Now there was an outflow and people spending down their money, plus seeking higher yields. Onto 2024, which I’d characterize as pretty much flat, not growth nor shrinkage. Back to present day and what the market is expecting. One is sluggish loan growth. So intuitively, you would think that would be a factor reducing deposits. But that’s not what we’re expecting. And we’re expecting deposits to actually grow again into that 3%-4% range, sort of a pre-COVID normal growth range.

The driver of that growth, despite the sluggish loan growth, is that banks have a renewed disciplined approach to repricing their deposit bases. There is going to be some healthy competition for deposits in 2025. Plus, we believe that more banks will consider paying down more costly or wholesale funding. And third, there’s broader awareness coming out of the regional banking crisis that as a customer you can have a large deposit with a bank, and you can actually protect it with FDIC insurance because of banks tapping additional funding solutions. Customers can keep larger balances at banks that are paying market interest rates.

This idea of the risk of an ever-shortening bank run timeline is top of mind after some high-profile examples in recent years. As you’ve noted: Advances in digital banking technology and the speed of information transmission through social media will continue to shorten the length of bank runs. Through 2008, bank runs if still rare averaged 7-15 business days. In 2023, Silicon Valley Bank and Signature’s runs lasted two business days (First Republic lasted 5-10 business days). Let’s discuss the issue historically and some best practices as banks and credit unions strategize.

You know, bank runs have occurred throughout history and the reasons the same: it’s a loss of confidence. It’s just the technology is accelerating time; it simply doesn’t take two weeks, basically, for a bank to experience a run. “It’s a Wonderful Life” doesn’t happen anymore. And it’s three things: it’s the information moving in real time; it’s also instantaneous withdrawal with a click; and while I agree with some that the high concentration in one industry from SVB customers for instance can contribute to unusual speed, at the end of the day, the real issue was the high ratio of uninsured deposits.

Now, the best practices to get ahead of it are fairly basic: Financial health management around understanding asset and liability management; liquidity and capital management; understanding duration, being honest about risk concentration; and having access to contingent facilities.

We obviously are in the business that goes about this in a couple of different ways. We can do it without affecting cash, so on a reciprocal basis. A bank can simply increase the percentage of insurance by interacting with other FDIC institutions in the network and basically exchanging ledger accounts without moving cash, so you’re not changing your funding strategies. Or, you could actually leverage what we call a one-way transaction to complement your funding strategies. If you need to push balances off your balance sheet, you can do that without turning deposits away. Or if you want alternative funding strategies, which may be more cost-effective, you can be what’s known as a receive-only institution.

Bank to the original question. There are likely always going to be bank runs. They are only getting faster. What matters more is financial risk management.

We’ve covered a lot about deposits and risks but anything I’ve missed? Bank leaders have flagged for BAI how important growing quality deposits is for them this year.

You always can look at deposits in different flavors, as you know: brokered versus non-brokered, retail versus institutional. But I think what the common denominator is, what the strongest focus should be on, is uninsured versus insured. There should be a strong focus on that. That should drive the analysis and the data-driven decisions.

Lastly, congratulations on your new role as CEO. Any leadership advice to impart that’s gotten you this far?

One of the most valuable assets to me has been the strong network I’ve built. Built and maintained, actually, which is especially crucial for women as leaders. Nourish it. Call on people when you need them. And then I’ve had the good fortune of knowing I can build a reliable team partly from that network.

The second point: Be intentional. Be aware of when you slip into autopilot. And that you are being watched. As a leader, you want to be thoughtful. You want to have emotional intelligence. Set priorities and hold yourself accountable above anyone else. And don’t be afraid to be humbled. You’d think that is at odds with being a leader. I can’t stress enough that it is not.

Lastly, communicate. Up, down and across an organization. That’s especially true when you’re in a growth phase and moving really fast.

Rachel Koning Beals is Senior Editor at BAI.