A financial institution’s main goal, like most businesses, is to increase efficiency and profitability, and one of those ways is to minimize non-interest bearing and low-earning assets. A large low-earning asset for most institutions is its Federal Reserve balance due to Reserve Requirements.
Deposit Reclassification is important to community banks and credit unions, especially in a rising interest rate market, because it allows you to reclaim your Federal Reserve balance, and invest that money into your institution and community.
Part of a bank’s or credit union's job is to lend out as much money as possible, while maintaining a healthy loan-to-deposit ratio. The funds sitting in the Fed are making minimal interest, so why keep them there if you can bring them back to the bank or credit union?
With the easy-to-implement Deposit Reclassification, financial institutions (FIs) have more money to invest. There’s no need for a FI to go to a third party to acquire money, when they can easily reclaim what’s already theirs from the Fed for minimal cost. Logicpath CEO, Douglas Ceto says “Any institution should maximize every dollar they own, and make sure it’s applied to their loan portfolio before they get more money from an external source.”
The best part? It's easy to do. Deposit Reclassification abides by all federal regulations, does not negatively impact the depositors and expresses permanent worth to the institution.
Reinvest in the Community
For community banks and credit unions, investing in the community is important. This can be done by giving out loans to community members and businesses, or by doing philanthropic work. Since their inception, a financial institution’s role is vital to the success of the community. FIs are trusted leaders, and they’re the people who continually help communities grow and thrive.
There are many ways FIs can make an impact in the community, such as creating educational outreach programs and investing in building projects in the neighborhood. With the extra funds from Deposit Reclassification, financial institutions can give out more loans to the community as well. By providing these loans, customers or members are able to buy cars, homes, and grow their businesses.
Money sitting in a Federal Reserve bank account due to reserve requirements may not be the most profitable option for the FI, and frankly, it's not profiting the community either. As your FI’s balance sheet strengthens, it’s a direct result from strengthening the community.
The Big Picture
At the end of the day, Deposit Reclassification is a simple solution to implement that ultimately helps a community bank or credit union continue the ongoing tradition of investing into its communities.