August 23, 2023

Unraveling the power of structured notes and deposits: A guide for banks

In the ever-evolving world of finance, structured notes and structured deposits have emerged as powerful financial products, offering investors unique opportunities to explore. While these products share certain similarities, their issuance and characteristics have distinct differences. In this article, we will delve into the nuances of structured notes and structured deposits, as well as explore the potential benefits they offer to banks, highlighting how these advantages vary based on the size of the institution.

Understanding Structured Notes and Structured Deposits:

Structured Notes: These debt securities are issued by financial institutions or corporations, entailing a fixed maturity date. Investors purchase these notes, with interest payments determined by a pre-defined formula linked to the performance of an underlying asset or index. Depending on the note’s terms, the investor’s principal may be subject to partial or total loss.

Dive deeper: Explore our use case on automating the issuance of structured notes

Structured Deposits: Presented as a bank deposit, structured deposits combine traditional deposit features with a derivative component. Like structured notes, they are linked to an underlying asset or index, with returns tied to its performance. Notably, structured deposits are generally considered lower risk due to the protection often provided by government deposit insurance, making them a safer choice for retail investors.

One can easily understand the benefits such products offer to banks depending on their size.

a. In the case of small banks:

• Diversification of Product Offerings: Embracing structured notes and structured deposits allows small banks to diversify their product range, granting clients access to more sophisticated investment options. This diversification can strengthen their market position and cater to diverse investor preferences.

• Competitive Edge: By providing structured products, smaller banks gain a competitive edge over local competitors that may not offer such products. This distinction helps attract investors actively seeking unique and attractive investment opportunities.

• Fee Income: Structured products often generate higher fees and commissions for banks. For small banks with limited revenue streams, this additional income can prove to be a valuable contribution to their financial standing.

In case you want to see how issuing your own products can also offer personalisation to your clients read the below articles.

How bespoke investments drive bank revenues

Why do banks not offer personalised products

b. In the case of larger banking institutions:

• Risk Management and Hedging: Large banks that already offer investment products can utilize structured notes to effectively manage risk and hedge clients’ positions and their exposure to specific assets or market movements. This strategic use of structured products helps maintain a balanced portfolio in the face of volatility.

• Capital Raising: Structured notes serve as an efficient method for large banks to raise capital from investors, supporting various business activities and expansion plans. This capital infusion can provide a significant boost to the bank’s growth trajectory.

• Enhanced Yield on Deposits: Offering structured deposits enables large banks to attract substantial deposits from customers seeking potentially higher returns than traditional deposits. This helps strengthen the bank’s deposit base and diversify its funding sources.

• Client Relationships: Providing structured products fosters stronger relationships between large banks and high-net-worth clients, as well as institutional investors, who are often on the lookout for sophisticated investment options. These enduring relationships can lead to increased customer loyalty and referrals.

Issue your own products and distribute them internally and externally with Futora

Navigating Regulatory Considerations: It’s important to acknowledge that structured notes and structured deposits are subject to different regulatory frameworks. Structured notes may be governed by securities regulations, while structured deposits fall under banking regulations. The regulatory environment can significantly impact the ease of issuance, compliance costs, and potential marketing limitations for both small and large banks. Therefore, a thorough understanding of regulatory requirements is crucial when offering these products.

As a conclusion we can note that structured notes and structured deposits represent a potent duo of financial instruments that can greatly benefit banks of all sizes. However, it’s essential to recognize that these products come with complexities and risks, and investors must carefully evaluate their terms, considering their risk tolerance and investment objectives.

Structured notes and structured deposits offer a gateway to a world of potential benefits for banks, but prudence and awareness are paramount to making informed decisions in today’s dynamic financial landscape. As we navigate the nuances of these products, Futora remains committed to insightful guidance and innovative solutions to our clients, ensuring they seize every opportunity while effectively managing risks. Together, we can forge a path to financial prosperity.

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