C. Myblog

To Grow Or Not To Grow—What? Is The Question

July 12, 2012

For credit unions that are growing deposits faster than they are growing loans, the question often asked is “what do we do with the money?” Perhaps the question should be changed to “should we have the money in the first place?”

While it may seem that no matter how low deposit rates are taken money still flows in, are deposit rates really that low?

Consider a credit union paying 25 basis points (bps) on money markets.  While that may sound low, recent yields on some of the largest uninsured money market mutual funds have been between about 1 to 4 bps, according to Bloomberg.  By comparison, this “low” rate paid by the credit union is about 6 to 25 times greater than what the consumer can get in the market—and it’s insured.

The point isn’t that credit unions should drop their money market rates to the same level as the mutual funds, but to point out that, even at these low rates, 25 bps can still be attractive considering the alternatives.

Some credit unions have instituted relationship pricing, rewarding members who participate in the cooperative and encouraging those who don’t to leave.  Others have identified that the growth is coming from their target market(s) and feel that they have the net worth ratio to “ride it out” for a while.

If your credit union is growing deposits faster than loans, at least two things you should know about the growth is:

  1. Who is bringing in the money?
  2. Why?

Growth that is coming from the target market(s) can provide opportunity, if not now, then in the future.  Growth that is coming from members parking funds may be money that should be discouraged or limited.

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