It has long been thought that higher rates will lead to higher deposits. But with the overnight federal funds rate at 5.25% and the 30-year bond at 4.71%, credit unions are facing real share pricing challenges.
As the industry struggles for share growth, many credit unions are targeting share certificates to grow deposits, raising rates much more aggressively than on core deposits. Share certificates currently have the highest average rate of all deposit products, even though as term products they fall farther out on the yield curve than demand deposits. They have also been the fastest-growing deposit product as of late, even with higher minimum deposit requirements.
Are raising share certificate rates a reliable strategy for increasing deposits?
A long-held assumption is that the higher the rate of return, the more attractive the product is to the member – and the more the deposit product will grow. This may have held true in the past, but with all the financial options available to individuals today, it may not be as easy to attract deposits anymore. With Americans spending beyond their income, fewer dollars may be available for saving – regardless of rate attractiveness. The analysis below supports this hypothesis.
We compared the change in share certificate rates over the past year to the change in share certificate deposits over that same period, and the results are quite surprising. This analysis results in a 0.07 correlation coefficient—which means no discernible relationship between the two variables.
In the graph below, the lack of correlation between the change in the rate and share certificate growth becomes clear. Credit unions are having a vast array of experiences: high rate changes and no growth, high rate changes and high growth, and low rate changes and high growth.
This finding goes against the conventional wisdom that higher rates will automatically yield higher growth.
With today’s ultra-competitive financial services market, individuals have access to a wide variety of services including high yield online accounts, the renewed popularity of stock market investing, and more competitive rates from banks.
With this interesting result, credit unions may want to consider re-analyzing their share growth strategy. Raising rates to stimulate growth that doesn’t occur adds more pressure to the net interest margin and ROA. Because every institution faces its own unique constellation of challenges and environmental factors, no one magic bullet will fix every challenge.