June 20, 2023

Leveraging structured deposits to lower bank funding costs

As central banks around the world raise interest rates to curb inflation, clients’ funds are finding their way into bank deposits which in turn requires banks for more Funding. For example, in the UK the Club Lloyds Monthly Saver account pays over 6% for 12 months, a rate that was unheard of as recently as a year ago, which leads to demand on clients side

Banks need to find more affordable funding sources, which is why they should consider issuing structured deposits. A structured deposit combines a traditional deposit with a derivative giving the holder exposure to an underlying asset such as a stock, currency or commodity. The product can either be subscription based, where the bank’s advisors or relationship managers sell a single investment to multiple customers, or bespoke meaning the bank designs the product to meet an individual customer’s needs.

Unlike a structured note, a structured deposit isn’t securitized, which reduces the issuance cost and the regulatory burden. But the main benefit from a funding perspective is the interest rate paid to the holder is lower than a traditional savings account. In some cases, the spread can go to 50bs p.a.. 

The structured product workflow

Issuing and distributing structured products involves several steps.

1) Research ideas: The bank has to understand the customers’ needs, including whether they want to grow their capital or generate income, their investment horizon and risk appetite. It must also classify the customers as retail, professional, or eligible counterparties as per the Markets in Financial Instruments Directive (MiFID). Based on this information, the bank researches and proposes the most suitable underlying asset.

2) Issuance: The first step in creating a product is determining the level of funding that the bank will use to purchase the derivative. Next, the bank needs to shop around with the sell side to make sure it gets the best deal, a process which is slow and resource-intensive when conducted manually. Then it has to execute the trade.

3) Distribution: Before distributing a structured deposit, the bank needs to ensure that it produces the documentation required by the financial authorities. In the EU, these rules are set out in the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation, which requires issuers to publish a Key Information Document (KID) outlining the features, potential return, risk profile and cost of a product. Once the regulatory requirements are met, the bank must decide on the optimal distribution channel, for instance through existing points of sale such as online or in-branch. This decision should take into account whether the product can be sold on an execution-only or advisory basis.

4) Lifecycle management: Finally, the bank must manage the product lifecycle. This step involves monitoring the value of the investment, and any events that may affect its value, so the bank can produce performance reports. It also entails distributing payments if the product generates an income and settling the investment should it deliver a return.

An automated, end-to-end solution

While issuing and distributing structured deposits may seem complex and time-consuming, Futora has developed a solution which automates the entire process. This solution provides tools for each step, from helping the bank to research ideas to creating the necessary regulatory documentation, managing deposits from multiple subscribers and calculating a product’s cash flow. Banks can either access it as a whitelabel platform or via APIs. Furthermore, Futora’s team has extensive expertise in the regulations governing structured deposits, having previously developed risk and performance models widely adopted by European banks. 

To learn more about Futora’s solution, arrange a demo today.

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