From June 2006 to September 2007, the Federal Reserve target rate was set at 5.25%. Once the effects of the subprime housing crisis began to fully emerge, the target rate began its precipitous decline, finally bottoming out at 0 to 25 bps in December 2008. This monumental shift occurred in less than 1 year and three months.
In 2008, the stock market plummeted, the financial services industry experienced widespread turmoil and dramatic merger activity, and federal insurance limits were raised. Coupled with the target rate decline, the deposit market experienced a dramatic shake-up in a short period of time.
Let’s examine the data to determine how credit unions have adjusted to this shift. This analysis uses data generated from Callahan & Associates’ quarterly First Look Program, which allows us to compare credit union data before complete year-end figures are officially released by the NCUA later this month. Thus far, Callahan has received data from credit unions representing a total of $237.5 billion dollars in assets, or approximately 29.2% of total industry assets.
The first graph displays the daily effective rate plotted against the Federal Reserve’s target rate over the last three calendar years. The second graph shows the average rate of several different credit union deposit products over the same period of time. Only credit unions offering each type of account were included in the individual average rate totals.
Credit unions have been actively ratcheting their rates down following Fed adjustments in the past two years, slightly lagging behind movements of the target rate. The two credit union products that have experienced the highest proportional decline in their average rate between 2Q 2007 and 4Q 2008 are money market accounts and share certificates, which declined 38% and 36% respectively.
Attracting more member deposits can be one possible positive result of deposit product rates slightly lagging behind the falling Federal Funds rate. However, in many areas, banks continue to aggressively search for deposits due to their desperate need for funding after the collapse of the secondary markets.
In 2008, total deposits grew 7.1% for First Look credit unions, essentially the same rate of growth as the previous year. All share accounts positively grew with the exception of Share Drafts, which declined slightly. Money market accounts and IRAs grew at the highest rates, 18.2% and 12.8% respectively.
As credit unions were slower to drop deposit rates, they operate on tighter margins. In this environment, tightly focused deposit pricing strategy and ALM management is critical. Now that it appears the Federal Funds target rate will remain at historic lows for some time, each credit union must adapt a sustainable strategy which best allows them to take advantage of their particular market conditions.