C. Myblog

Interest Rate Risk and Member CD Early Withdrawals

October 24, 2013

An important component of A/LM modeling that some interest rate risk (IRR) models ignore is applying early withdrawal assumptions to Member CDs. This is especially true for credit unions whose members are rate sensitive and/or accustomed to higher rates. If models do not consider early withdrawals, the benefit of longer-term CDs can be materially overstated in a rising rate environment in relation to the relatively high cost today. This is particularly relevant in today’s historically-low interest rate environment.

While some might argue that “members don’t like fees” and that will be enough of a deterrent for members to hang onto their lower-rate CDs, consider the amount of members willing to pay to refinance their mortgages in recent years. Yes, mortgages are often more top-of-mind for members, but the moral of the story here is that, for many credit unions, the recent economic downturn has heightened member awareness of the cost-benefit of their financial decisions. This applies more so to members with higher-balance CDs.

Developing sound assumptions for early withdrawals can be challenging, but keep in mind that it makes sense to have the withdrawal assumptions increase for longer-term member CDs.

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