Posts

/by

Is Now a Good Time to Increase Deposit Rates?

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.

/by

Recent Rise in Rates…

, ,

Many thought that the recent Fed actions would drive rates lower, or at least help keep them at their extraordinarily low levels.  However, in the roughly seven weeks since the Fed announced the second round of easing, the 10-year Treasury rate has actually increased about 100 bps, from 2.5% to about 3.5%.  Thirty-year fixed mortgage rates have increased a similar amount over that period of time.  Shorter and medium-term rates have increased as well.

The increase in rates may impact recently completed 2011 budgets, with some positive effects, some negative.  If your credit union plans to originate and sell mortgages, you may consider testing a possible negative impact on volume and on associated non-interest income, if you have not done so already.  On the bright side, if your credit union is planning to book and hold mortgages, the increase in rates could make that decision look more attractive.

With the rise in investment yields across most points on the yield curve, credit unions might be able to top their projected investment income for 2011.  Others may see the rise in rates as an opportunity to shorten the planned duration of new investments while still hitting budgeted investment income targets.  Of course, long-term rates could drop in the next few weeks.  However, if rates stay where they are or move higher, credit unions should be discussing the likely impacts on their balance sheet management strategies heading into 2011.

/by

Consumers Shunning Risk

, , ,

The question that many credit union leaders are asking themselves lately is, how far do we reach for yield?  With 10-year Treasury Rates rounding near 3% recently, how far can the balance sheet be pushed to make up for a squeezing margin?

Consumers at large are facing a similar dilemma when it comes to managing their own balance sheet.  How much risk is too much?  And with the world turning on its head, with perceived threats of war on the Korean Peninsula and dark concerns about the financial stability of European markets, that question is becoming harder to answer.  Even as consumer confidence is up on news of positive job forecasts, the Dow has tumbled below 10,000—not crossing that threshold since February 8th of this year (Dow Falls Under 10000 as Risk Is Shunned, WSJ, 5/25/10).

As the world continues to become more complex, and as ripples from the financial crisis and new developments in world affairs unfold, be mindful of consumers’ tendency toward safety.  While many credit union leaders cannot imagine another influx of low-cost funding, the perceived chaos in the world around the consumer could theoretically cause just that.  Consider stress testing what could happen if you experience another flight to safety of similar (as well as greater) magnitude combined with anemic loan demand to see the impact to your net worth ratio.  If net worth is at high risk of dropping below Well or Adequately Capitalized, identify viable steps you can take to be prepared.