Financing the Financials: Funding Trends in the New Economy

The recent economic environment has altered traditional funding mechanisms for financial institutions. Lower profits, a constrained lending environment, and shifting dynamics between asset classes and maturities have been major game changers, removing the flexibility and diversity of choice long enjoyed by borrowers.

Constrained funding has become a key agenda topic for financial institutions. Increased demand has been intensified by firms requiring emergency funding to avert insolvency or fulfill immediate refinancing requirements, in addition to firms seeking value accretive transactions. Access to cheaper funding has emerged as a major competitive advantage, causing increased competition among banks for retail deposits.

In a new report, Financing the Financials: Funding Trends in the New Economy, Celent examines the recent changes in funding trends for financial institutions and presents a structural framework to better understand the issues around funding and liquidity for financial institutions, with a particular emphasis on banks.

"The search for reliable, stable funding sources will continue to be a major agenda item for financial institutions," says Ismail Colak, analyst with Celent’s Securities & Investments group and co-author of the report.

"A lack of coherent, detailed capital management framework is a luxury few can afford today. Corporate and legal structures are likely to materially change in order to adapt to the new funding environment," he adds.

The funding environment in the near future is likely to come with stricter limits, less negotiating power for borrowers and is likely to push institutions to look for alternative sources of capital. Reliance on short-term wholesale funding will be increasingly replaced by long-term financing that can provide a longer maturity horizon. As the traditional and fundamentally cheap funding source, deposits are likely to become a hot bed of competition again, albeit not without additional costs.

A diversified funding base and active, dynamic funding framework are essential for avoiding similar credit situations in the future. Soon we may begin to see more crowded teams of experts solely dedicated to capital management, more sophisticated risk and liquidity management tools, and higher management involvement in ultimate funding actions.

The report is 52 pages and contains 23 figures and four tables. A table of contents is available online.

of Celent's Finance & Risk and Capital Markets research services can download the report electronically by clicking on the icon to the left. Non-members should contact info@celent.com for more information.