WaMu: Why Core Deposits Matter

If you want to understand the value to banks of having a strong core deposit base compared to reliance on wholesale funding, take a look at what Washington Mutual (WM) is lately having to pay on a one-year CD: a whopping 5%. That’s fully 135 basis points more than what the typical one-year CD pays, according to Bankrate.com.

To me, it’s the latest piece of evidence that the conventional wisdom on how to run a bank is completely upside down. Kerry Killinger built his empire by aggressively generating assets—in this case, by selling mortgages of just about every shape and size, to basically anyone who wanted one. Unfortunately how those mortgages were funded was an afterthought. So as WaMu’s asset quality has deteriorated, the company has had to rely for funding on sources such as FHLB advances and high-priced deposits. Worse, should credit at WaMu continue to deteriorate, its funding squeeze figures to only get worse.

To me, the key to building a banking franchise is building a strong core deposit base. There is never a time that banks don’t depend on funding by outsiders. When times are good, bankers can be tempted to follow the path of least resistance and rely on brokered CDs and other forms of wholesale funding. But that can come back to haunt them when the cycle turns down. Now, when times are not so good, that wholesale money either flies out the door or becomes exorbitant to retain. Banks end up having to pay up for capital at the time they need it the most.

People used to chuckle when I’d remind them that core deposits don’t charge off. Now, with so many banks facing a rising tide of bad loans and fleeing deposits, I suspect a lot of bankers are seeing the wisdom of building a solid, loyal base of depositors.

Comments

[Financial Cents]

I'm very surprised that WaMu and other bigger banks haven't failed yet! With a D+ rating and a $4 stock, how long can this bank operate before its demise?

2008 Sep 02 01:48 PM

[tom2987]

WAMU was one of the first to start reserving for the impending mortgage problems, the first to raise liquidity, now will be the first to dramatically increase deposits. They've been relentlessly punished by the media for doing so, but I think they are ahead of the curve in responding to the financial problems (yes, the ones they helped create). I've spoken to several people, family, coworkers, that have moved money to WAMU CDs in the last couple of weeks. I think people will surprised just how many new depositers they get.

2008 Sep 03 02:39 PM

[Jeffers801]

I'm amazed that Seeking Alpha, a respected site for this industry, continually allows this criminal to espouse his opinions on how a bank should be run when he was thrown head first out of Commerce. His words should be typed on a computer in a prison library.

2008 Sep 03 03:43 PM

[LoadedBanker]

Cheers Jeffers, I couldn't agree more. Vern, deposits are so important you might, say, do ANYTHING to get them? Like, hypothetically speaking, grease a few palms to get local governments to pony up their cash?

2008 Sep 04 08:45 AM