As a former bank executive managing over $500 million in wholesale deposits, and as a participant in three mergers in Texas and New York, I question the industry's ability to identify serious exposures in its deposit management.

Every year some agency tries to prevent third-party brokers from being utilized by some or all issuing institutions. However, rather than kill the messenger, you should check out the message or its source.

For five years now, I've been managing a money desk department utilizing in-house salesmen to generate jumbo deposits on a national basis. In this time, I've been audited only twice, once by a Federal Home Loan bank and once by the state.

These limited examinations did not question my criteria for pricing, my positioning, my integration with the institution's cash flows, my marketing approach, or a dozen other key issues that establish a deposit management structure.

Ignorance and Fear

The key issue has always been the word "jumbo."

Everyone associates jumbo certificates of deposit with high rates and millions of dollars flying in and out of an institution each day.

The government bought this argument. If you don't understand the program cancel it and let the taxpayers figure it out!

One example of the regulators' not understanding deposit management is the Federal Home Loan Bank as Agent Program.

This program generates deposits that all mature on the same date, and it utilizes an index (London interbank offered rate) that is not used as a lender index by most institutions. It doesn't even closely follow the national daily market of jumbo CDs.

Is this prudent management?

Brokers' Needs vs. Yours

Regulators are not the only ones at fault. Brokers, who have tremendous resources to fund an institution instantly with millions of dollars, do not provide any management information to the issuing institutions.

Block money from the Prudentials, Shearsons, etc. is attractive coming in. However, when everything is tied to one rate, one market, and one maturity date, you had better feel real comfortable with their markets versus your time frames and your ability to replenish such lost deposits.

Remember that the more money you have tied in with brokered deposits all coming due at once, the more commitment you just made to be tied to broker deposits.

Engineered Catastrophe

Also on the list of lost souls are consultants.

Without establishing deposit modules or identifying the mix of maturities and terms, a Big Five consultant advised a Southwest Plan thrift institution to issue deposit terms of only 90 days or less for new and renewing deposits. The decision led in a tremendous run on deposits.

Ironically, the consultant continued to get paid.

When I managed $500 million in jumbo deposits with few or no other funding sources, I developed cash and deposit modules that enabled me to position deposits on specific maturity dates taking account of the bank's cash-flow strengths and weaknesses along with the exposures of seasonal markets.

In addition, the modules would guide the pricing of new and renewal deposits, project the probabilities of renewals, and establish strong integration with cash management.

The Well-Designed Module

This program should be the basis for regulatory and internal audits and for the liability business plans of credit unions and banking institutions.

Setting specific guidelines within the module dictates positions reflecting a plan of deposit management, instead of today's scenario of assumptions.

Thus, it does not matter where or how your deposit is originated so long as deposit module and reports dictate a specific position in liability management - a position easily identified, measured, self-audited, and regulated.

Mr. Gatto is president of Houston-based Atwood, Patterson & Reed, deposit-management consultants.

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