NEW YORK–Even as rates appear to have peaked and markets are waiting on the Fed to cut rates, a new analysis has found many depository institutions are continuing to use the one-year certificates of deposit with relatively high rates to attract and retain customers.
“The rates on high-yield savings accounts have attracted attention from the press and consumers alike, and for good reason: Data shows that a fair portion of the annual percentage yields offered by banks and credit unions are far above the norm,” S&P Global Intelligence reported. “But those institutions tend to be extreme outliers. A better bellwether of where depositories are competing heavily is deposit betas and, by that measure, one-year CDs and premium money market accounts are the key focal points.”
S&P said a comparison of CD maturities reveals that banks and credit unions are betting on the Federal Reserve lowering rates — and have been for over a year — by leading with higher rates on one-year CDs versus longer-term products.
‘Far More Rate Sensitive’
“Sharp increases in interest rates and regulators' focus on bank liquidity have put a premium on all deposits, but some deposit products have proven far more rate-sensitive than others through the Fed's tightening cycle,” S&P Global said. “One-year CDs were among the products with the highest implied cumulative deposit betas since the Fed started hiking interest rates in March 2022.”
According to the S&P Global analysis, the national average APY on a one-year CD with a $100,000 investment minimum has risen 184 basis points since March 4, 2022, “implying that 35% of the 525-basis-point increase in the effective Fed Funds rate flowed through to the APY.”
The Findings
Premium money market accounts with large investment minimums were also in the top five, along with a one-year fixed individual retirement account, the company added.
Industry data shows how banks are using CDs to bolster their deposit funding, as well, S&P Global reported, finding:
- For the commercial banking industry, the ratio of CDs-to-total deposits rose to 15.5% in the first quarter of 2024 from 15.3% in the fourth quarter of 2023 and 14.5% in the third quarter of 2023.
- The percentage of CDs repricing in one year, relative to the commercial banking industry's total deposits, continued to climb in the first quarter of 2024, rising to 13.2% from 12.9% sequentially, providing further indication that banks are concentrating their deposit bases in shorter-term CD products.
‘Stark Discrepancies’
“One of the most stark discrepancies between short-term products and long-term products is the rate on one-year CDs relative to longer-term CDs,” S&P Global stated. “In mid-February 2023, the one-year CD rate eclipsed the three-year rate, and in early April of that year it started trading above the five-year rate. The fact that one-year CD rates are higher than the other, longer-term rates suggests that banks and credit unions anticipate interest rates will be lower in the next 12 months, which aligns with the futures market.
‘No Secret’
“Our analysis includes both credit unions and banks, as it is no secret that credit unions tend to offer higher rates than banks,” S&P Global continued. “The median and average APYs offered by credit unions were higher across nearly all products as of June 14. The divide between banks and credit unions can even be seen at very high APY levels. Approximately 42% of credit unions were offering one-year CDs with an APY above 4% — an APY that is roughly double the national average — whereas only 23% of banks were, based on institutions for which rates were available. Those credit unions accounted for 53% of the deposits of all credit unions in the U.S., versus only 15% for banks.”
Additional Findings
Additional findings, according to the S&P Global analysis:
- The number of credit unions and banks offering APYs above 4% continued to climb from the end of March 2024 to the middle of June, suggesting that depositories are increasingly willing to pay higher rates. “But when one raises the threshold to 5%, it paints a different picture. The highest rate payers seem to be pulling back somewhat,” S&P Global said. “The trend of more institutions offering upward of 5% reversed in the fourth quarter of 2023, which was the same point at which credit union and banking industry deposits began to grow again, following several quarters of declines. A reduced need for funding is an important factor in institutions' decisions to rein in rates.”
- While most depositories have relied heavily on CDs for funding, savings accounts are notable for the number of banks and credit unions that offer rates way above the norm. According to the analysis, the median APY on a regular savings account with a $2,500 minimum investment was only 0.18% as of June 14, whereas 651 institutions were offering APYs of 0.68% or more — the upper threshold for outliers, as explained in the "About the analysis" section below. By contrast, all the APYs on the 1-year CD were within the normal range, S&P Global stated.