C. Myblog

Hot Money In Waiting

May 24, 2011

Many credit unions continue to see higher levels of deposit growth despite lowering rates—and even a rising stock market—as members choose safety and certainty over return.  While the flight to safety has been discussed at length, the gradual shift from CDs to share products has received less attention.

Over the past 6 to 12 months, many credit unions have seen decreases in CD balances with a corresponding increase in share balances, in addition to the increase in overall deposit balances.  Such a trend suggests that members are willing to park their money in a lower-paying share account rather than lock their money up in a higher-paying CD in order to have the flexibility to reinvest their money when a better alternative presents itself.  As a result, these balances could be hot money in waiting.

Credit unions should evaluate the change in their liability mix over the last year and consider how any shifts might affect their liquidity concerns, product needs and cost of funds going forward—especially in different rate environments.  Likewise, it would be prudent for institutions to incorporate this additional rate sensitivity into their modeling, particularly if a clear shift can be identified.  Modeling the hot money as 30-50% more sensitive than other share balances is a good place to start.

Whether the impact is large or small, the credit union will be better positioned to handle the reinvestment of hot money should it occur.

Start typing and press Enter to search