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Illiquid Banks Forcing Liquid Ones to Overpay for Deposits

The sooner "liquidity challenged" banks fail the better for other banks, which find themselves paying more for consumer deposits than they otherwise would, an executive from TD Bank told BAI's Retail Delivery show.

Answering a question from the audience about likely consolidation within the banking industry, Thomas Dyck, executive vice president of TD Bank, said, "Consolidation can't happen fast enough." He went on to explain that a bank like TD is effectively penalized by the effect that poorly capitalized banks are having on the market—driving up the going rate for consumer deposits. "TD has avoided the entire subprime market. We are liquidity rich," he said.

Speaking afterwards to BS&T Dyck explained that the credit crisis has put deposit products at a premium—literally. For a bank that badly needs funds paying 4 percent on a one-year CD beats the six percent it might have to pay to borrow money from another institution in the wholesale market. However, TD could, for argument's sake, raise funding at 3 percent in the wholesale market because TD is such a low risk, making consumer deposits effectively a cost to the bank, not a gain.

"If I could raise funds at 3 percent and the current environment says I must pay 4 percent on a CD why would I? The reason we go for it is to get other business. We still have to compete." "The checking account is the lynchpin of the banking relationship," Dyck maintained in his presentation, in which he predicted, "Deposits will be a key battleground" in 2009 with "aggressive" price competition. However, banks need to be innovative in how they approach deposits and, ultimately, having a strong brand might be even more important than rate.

Deposits are far more expensive than historically, Dyck noted. What banks are willing to pay for deposits is out of line with what they themselves can make on their own investments, he said.

Dyck is responsible for the range of deposit products—checking, savings, CD, money market or debit card accounts—that some four million households have with TD.

"Banks that have been responsible have a very different view of the value of a deposit," Dyck noted in his address, adding, "once less solid banks are acquired we will see a more responsible approach to lending." TD Bank and its Toronto-based parent kept servicing all the mortgages it originated rather than selling them on, Dyck noted afterwards. However, he shied away from the suggested term "bad banks" preferring to refer to them as "liquidity challenged".

The World Economic Forum in October rated Canadian banks as the soundest in the world, with U.S. banks trailing down the list in 24th place, after unlikely predecessors, such as Namibia.

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