Why Loan Marketplaces for Banks are a Solid Solution to Liquidity
In 2020, as the pandemic and economic uncertainty reigned, the banking industry began to see significant surges in liquidity. This trend was spurred on by a combination of conservative financial decisions, such as consumers stockpiling cash rather than borrowing, and PPP deposits.
Whether to satisfy regulators or drive return, joining a loan marketplace is one method of deploying excess liquidity. Read on for everything you need to know.
To learn the core banking qualities you need to further optimize your lending strategy, check out our updated white paper, The Definitive Guide to a Modern Core Banking Partnership.
Why Do So Many Banks Have Excess Liquidity?
The pandemic created a unique confluence of events that affected the lending market. Between government stimulus initiatives and actions by the Federal Reserve, liquidity quickly began to rise. To quote the New York Times, “Consumers and businesses benefited significantly from government stimulus efforts, which reduced demand for credit and helped them pay off their debts or amass more cash.”
As recently explored by the Federal Reserve, bank deposit growth soared during the pandemic. While this year’s data collection is underway, it’s noteworthy that domestic deposits were at $12.77 trillion in June of 2019 and rose to $17.2 trillion during the 2021 reporting period.
In addition, many banks took a more conservative approach to lending, concerned about the potentially negative impact of the pandemic on employment and businesses. And consumers’ declining credit quality, paired with the still approaching CECL transition, forced institutions to provision for greater losses.
Many of these trends have continued into 2022, leaving banks flushed with liquidity. As lending remains a primary revenue driver, many institutions are revising their lending strategy to generate yield for investors. Such strategies include embracing digital lending systems, streamlining small business lending processes or navigating loan marketplaces for participation across the country.
How Does a Marketplace Lending Work?
A trusted loan marketplace connects bankers nationwide to enable loan participations. This creates a curated network of regional community financial institutions, third-party originators and investors across the United States.
There’s no cost to look at potential loan opportunities available and you remain anonymous until you finalize a transaction. It’s perfect for any institution hoping to become:
- Participants: Buyers can access key loan metrics and attributes of each deal upfront, including the seller’s underwriting process to help you determine what’s right for your portfolio. Once a whole loan, participation or other opportunity of interest is identified, the buyer submits preliminary interest through the platform. The originator or selling party reviews the request and once NDAs have been executed, the buyer or participant work together to finalize the transaction outside of the marketplace. Private personal information is not exchanged until this time and this transaction costs 25bps, or 0.25% of the interest rate, to buy or sell.
- Lead Lenders: Sellers can efficiently and anonymously post participation opportunities. Once the loan or loan portfolio is approved and posted live on the marketplace, prospective participants/buyers can search, view, favorite and/or submit offers on the opportunity or any other active deal(s) on the platform. Buyers can also set specific parameters, enabling the matching algorithm to automatically find and recommend new opportunities or capital partners that meet their unique transaction criteria, including asset type, size or geography.
Ultimately, your reasons to buy or sell are those you’re already familiar with. Whatever the need, this technology can streamline existing procedures, help you optimally align with target relationship profiles and drive return from excess liquidity.
Using Loan Marketplaces to Balance Your Portfolio and Credit Risk
These marketplaces enable you to become partners of a sort with other banks, establish preferred loan types and optimize quality and price by selecting from a diverse set of deal flows. This gives a big boost to financial institutions, especially smaller community ones, that would like to grow their lending network beyond their geographic market and enable participation across one or more banks.
Perhaps you’ve merged with another institution and need to minimize risk from existing credits you inherited. Maybe you have a strong borrower and want to keep doing business with them despite reaching your lending limit. In either case, you can post the loan and determine whether to retain the servicing rights.
Banks commonly struggle with a high concentration of certain asset categories that need to be offloaded. But you don’t have to rely on your immediate network. For example, a rural community bank with mostly Ag loans can easily connect with a metropolitan bank with a portfolio consisting of commercial real estate (CRE) loans.
In so doing, you can also make your institution less vulnerable to local economic slowdowns or sudden declines of loans of certain types like we saw during the pandemic.
Using Marketplace Lending to Streamline Procedures
This new technology simplifies the process of growing assets or disposing of them when lending limits or risk concentration becomes too high. Much like digital loan origination software, a modern loan marketplace decreases internal resource demands and enables you to manage the transaction process through a single point rather than across multiple parties.
Better still, you can monitor your financial institution’s performance against peers using interactive visualizations of current call report information for all FDIC- and NCUA-regulated institutions. These analytics offer performance metrics, allocation, competitive analyses and actionable insight.
Between more efficient procedures and market intelligence concerning how peers are transacting, this environment reduces the complexity of lending and deal origination. It also makes your decisioning more straightforward, so you can make the best choices for your institution.
What’s Next for the Lending Market?
According to Reuters, total loans had increased by 3.8% in February of 2022, driven largely by business loans. However, the March and June 2022 interest rate hikes will almost certainly affect loan growth going forward.
As you keep an eye on the developing landscape, a marketplace lending is worth considering. It’s a new take on a traditional process, but with no fee to participate, there are virtually no downsides. Meanwhile, your institution stands to achieve higher returns, expand your loan access and easily diversify your loan portfolio.
While you optimize your lending strategy, don’t forget that the right enterprise core powers advancements like digital lending services. Learn what to look for in our Definitive Guide.
Simon Fisher joined CSI in August of 2020 to expand CSI’s digital lending strategy. Prior to joining CSI, Simon worked as a consultant helping banks around the U.S. conduct core evaluations. Simon has a fundamental understanding of industry trends by evaluating multiple platforms. During his career, Simon has worked many different lending roles for a community bank during his 10-year term, including retail, commercial and mortgage loans. Simon understands the complexity of different loan types and is working to deliver the best digital experience for loan officers as well as borrowers.