Banks generally “beat to their own drum”. Unlike credit unions, which tend to be “clicky”, banks will do what is only best for them and each bank is different. If a commercial bank is open, it is investing continuously and has existing broker relationships. That is a certainty. Banks are in business for one thing - to earn more money. Generating greater returns on their loans and their investments is what they are in business for. Loan demand is your biggest objection. Banks feel obligated to push for greater loan demand from their customers. Mortgages, car loans and other loans generate income for long periods of time.
The available funds not used for loans are used for investments. Banks will keep a certain amount of money in Federal Funds or “Fed Funds”, as they are usually called. Fed funds is an overnight bank to bank lending rate. Banks with excess money can sell fed funds to their banks. Banks with low liquidity will borrow through it. Either way, it is a formidable competitor for bond brokers. The ease of fed funds allows for quick and easy, overnight rate of returns. However, the fact that fed funds is overnight, presents a problem too. Banks should not have an over abundance of money in overnight accounts, simply because it does not allow them a chance to “lock in” a fixed rate if interest rates decline. They will just “drift” downward as interest rates decline. Simply put, fed funds should be for reserves and convenience, but not a long term investment policy. If the bank is going to hedge themselves against interest rates rising (which brings bond prices down), then they need to move some money out of there.
Banks can buy almost any debt (bonds, notes CD’s). Most will not buy low grade corporate bonds, but pretty much everything else is open. What they each buy depends on a few things:
Asset size
Current investments
Loan demand
How educated they are
Asset size of a bank is important when determining whether you should contact them. Your best chance for success, if you are looking to work independently, or for a firm is Banks with assets between $100 million - $700 million. A bank with $100 million in assets may have $15 million in investments for instance. Portfolio sizes of $15 million to $100 million should be your target. You want to stay away from pursuing accounts much smaller than that, because the amount of time and work you put in trying to get them to work with you will not be worth the payout. Banks that are over 1 billion in assets are simply too big for most. Not for the reason you may think. They are not that much more
complicated, but they have in-house direct investment officers that do it themselves. You may get lucky where they call you back and buy something, but you will be working so “thin” (price/mark up), that it will be hard to make money. Bonds are based on “mark ups”, if a firm is offering the bond to you at $97 ($970 per $1000 bond), you can mark the bond up in price from their. ¼ of a point to a ½ a point is a normal mark up for most bonds. With the bigger banks, it will be hard to get that much into the bond. They are usually being called by a lot of brokers, and may be seeing the same thing. You don’t want to be showing a bond that is overly marked up in price. He may not want to talk to you anymore. So, the rule with the big banks ($1 billion+) is, work thin, don’t overwork, and just hope that he calls you back on occasion over the “other guy”.
Smaller to medium size banks are passed over by the large primary brokerage firms. So, not only, can you get in easier, it is more potentially rewarding. These banks can be educated, they won’t have a “team” of investment pros at the bank, so your suggestions and education presentations may pay off. It is also rewarding in that these smaller banks will put more “Stock” in personal relationships. You won’t get a lucky 2nd phone call trade, like you could get with a big bank buying everyday, but once they are opened, you can bring them into your philosophy and strategy. Personal relationships have a much better chance to grow, and your chances of always being undercut on price from other brokers, won’t happen as often. The smaller banks do not have the time to talk to 10 brokers every day. What you want, and this applies to any institution, is to be either their only broker (not likely in the beginning), or be one of three that he is dealing with. A sophisticated bank will spread the trades so that all of you get something.
The available funds not used for loans are used for investments. Banks will keep a certain amount of money in Federal Funds or “Fed Funds”, as they are usually called. Fed funds is an overnight bank to bank lending rate. Banks with excess money can sell fed funds to their banks. Banks with low liquidity will borrow through it. Either way, it is a formidable competitor for bond brokers. The ease of fed funds allows for quick and easy, overnight rate of returns. However, the fact that fed funds is overnight, presents a problem too. Banks should not have an over abundance of money in overnight accounts, simply because it does not allow them a chance to “lock in” a fixed rate if interest rates decline. They will just “drift” downward as interest rates decline. Simply put, fed funds should be for reserves and convenience, but not a long term investment policy. If the bank is going to hedge themselves against interest rates rising (which brings bond prices down), then they need to move some money out of there.
Banks can buy almost any debt (bonds, notes CD’s). Most will not buy low grade corporate bonds, but pretty much everything else is open. What they each buy depends on a few things:
Asset size
Current investments
Loan demand
How educated they are
Asset size of a bank is important when determining whether you should contact them. Your best chance for success, if you are looking to work independently, or for a firm is Banks with assets between $100 million - $700 million. A bank with $100 million in assets may have $15 million in investments for instance. Portfolio sizes of $15 million to $100 million should be your target. You want to stay away from pursuing accounts much smaller than that, because the amount of time and work you put in trying to get them to work with you will not be worth the payout. Banks that are over 1 billion in assets are simply too big for most. Not for the reason you may think. They are not that much more
complicated, but they have in-house direct investment officers that do it themselves. You may get lucky where they call you back and buy something, but you will be working so “thin” (price/mark up), that it will be hard to make money. Bonds are based on “mark ups”, if a firm is offering the bond to you at $97 ($970 per $1000 bond), you can mark the bond up in price from their. ¼ of a point to a ½ a point is a normal mark up for most bonds. With the bigger banks, it will be hard to get that much into the bond. They are usually being called by a lot of brokers, and may be seeing the same thing. You don’t want to be showing a bond that is overly marked up in price. He may not want to talk to you anymore. So, the rule with the big banks ($1 billion+) is, work thin, don’t overwork, and just hope that he calls you back on occasion over the “other guy”.
Smaller to medium size banks are passed over by the large primary brokerage firms. So, not only, can you get in easier, it is more potentially rewarding. These banks can be educated, they won’t have a “team” of investment pros at the bank, so your suggestions and education presentations may pay off. It is also rewarding in that these smaller banks will put more “Stock” in personal relationships. You won’t get a lucky 2nd phone call trade, like you could get with a big bank buying everyday, but once they are opened, you can bring them into your philosophy and strategy. Personal relationships have a much better chance to grow, and your chances of always being undercut on price from other brokers, won’t happen as often. The smaller banks do not have the time to talk to 10 brokers every day. What you want, and this applies to any institution, is to be either their only broker (not likely in the beginning), or be one of three that he is dealing with. A sophisticated bank will spread the trades so that all of you get something.
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