C. Myblog

Is Now a Good Time to Increase Deposit Rates?

February 6, 2014

Over the past few weeks there has been some increased discussion in ALCO and board meetings about increasing deposit rates in the near future. Some credit unions have already increased deposit rates, while other decision makers are feeling pressure to do so.

Although short-term Treasury rates, which typically drive deposit rates, have changed very little in the past six months, there are other reasons why some feel compelled to increase deposit rates.

When we ask why they are considering raising deposit rates, the most common response is:

“Loan demand is starting to increase and we want to reward our depositors, who have faced rock-bottom dividend rates for the past five to six years.”

Before a decision is made we highly encourage decision makers to compare their deposit rates to those of money market mutual funds, which are not insured by the full faith of the government. A quick search will show money market mutual fund yields of roughly one to five basis points.

Conventional wisdom should suggest that the extra risk of the money market mutual fund comes with extra return – but, currently that is often not the case with credit unions, as they often pay higher dividend rates without the added risk. Beyond providing additional safety, credit unions also bear the cost of infrastructure (such as branches/call centers) to attract and support deposits.

While it is understandable to want to give back to depositors in the form of higher rates, remember that it could be another few years of short-term rates continuing at historically-low levels. Many are expecting the margin to continue to decline, even with improvement in loan demand. Increasing deposit rates would put even more pressure on the margin.

Start typing and press Enter to search