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From wholesale to deposits: transforming a funding stack

Case StudiesModule 101 of 111
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CASE STUDY 1: From Wholesale to Deposits - Transforming a Funding Stack

The Situation

First Capital Bank (fictional), $45B in assets, was traditionally a wholesale-funded institution. In 2015, deposits were only 55% of funding; wholesale debt was 45%. The bank relied on capital markets access and had significant maturity risk (wholesale debt had to be regularly refinanced).

Then came 2020-2022: Rates fell to near-zero, deposit inflows exploded (pandemic stimulus, low rates). First Capital suddenly had more deposits than it could deploy profitably. Wholesale funding shrank to 30% of total.

By 2023, the rate environment had reversed: Fed raised rates; wholesale funding was expensive again (4.75%); but the bank now had a deposit base and didn't need wholesale funding.

The Challenge

First Capital needed to transition from a wholesale-funded bank to a deposit-funded bank. This required:

1. Building deposit franchise: Invest in branches, digital banking, customer service
2. Redefining customer base: Shift from institutional (wholesale) to retail/SMB (deposits)
3. Resizing wholesale funding: Close wholesale funding relationships no longer needed
4. Managing the transition: Don't create a cliff where wholesale funding evaporates

The Solution

Phase 1 (2020-2021): Building Deposits

  • Launched digital savings platform (high rates, easy access)

  • Added branch in high-growth markets

  • Invested in business banking (payroll, treasury services)

  • Result: Deposits grew from $25B to $32B (+28%)


Phase 2 (2021-2022): Reducing Wholesale Reliance
  • Matured wholesale debt on normal schedule (didn't roll over)

  • Reduced wholesale funding from $20B to $10B

  • Maintained relationships with key wholesale counterparties (for future needs)


Phase 3 (2022-2023): Optimizing Mix
  • By end of 2023: Deposits $38B (84%), wholesale $7B (16%)

  • Deposit mix: 60% retail, 40% business (strong diversification)

  • Deposit betas normalized to 70% (competitive but stable)


The ALM Implications

Funding cost:

  • 2015: 65% wholesale (4%) + 35% deposits (0.5%) = Blended 2.5%

  • 2023: 84% deposits (3.8%) + 16% wholesale (4.5%) = Blended 3.85%


Deposit-funded costs MORE in a high-rate environment! But the bank preferred stability.

Duration and EVE:

  • 2015: Wholesale funding (2-5 year maturity) = Liability duration 2.0 years

  • 2023: Deposits (sticky, effectively 2+ year) = Liability duration 2.2 years

  • Asset duration stayed stable: 3.5 years

  • EVE sensitivity: 2015 was -10% to -200 bp; 2023 is -9.5% (improvement due to stable liabilities)


Liquidity:
  • 2015: Wholesale maturity cliff (had to refinance regularly)

  • 2023: Deposit base is stable (lower refinancing risk)


The Takeaway

Transitioning from wholesale to deposit-funded requires:
1. Long-term commitment (5+ year timeline)
2. Investment in franchise
3. Acceptance of higher funding cost in exchange for stability
4. Careful management of the transition (don't create funding cliffs)

First Capital's board made the strategic choice: We'll pay a bit more for funding, but we'll be more stable and less dependent on capital markets. That's a valid ALM strategy.