LAKE FOREST, Ill.—A new report reveals that retail CD deposits rose 16% in 2017 over 2016, a strong sign consumers are willing to once again to reinvest in certificates.
That same analysis is cautioning however, that if financial institutions don’t raise their rates soon to compete with high-rate offers available online, they could experience a runoff in some core deposits.
“Credit unions, as well as banks, have to watch their checking and share balances very carefully,” said Michael Moebs, economist and CEO at Moebs $ervices. “We are at a pivotal point to increase CD rates. If the CU needs deposits then raise rates now. If not, then they can wait, watching checking and share balances. Plus, the rate change needed is large. For six-month CDs it means doubling the current average of 0.20% to 0.40%. The timing and amount of the rate increase on retail CDs is critical to keep deposits and get more.”
The Moebs CD study shows that this is the first time in nine years deposits in retail CDs have increased year over year. Looking back, in 2008 retail CDs totaled $1.406 trillion in deposits in contrast to 2017, which had retail CDs at $404 billion. The decline of 71.3% is a reflection of the mortgage bubble bursting in September of 2008, said Moebs, who reminded that a month later Congress reacted with a massive bailout of all depositories and the Federal Reserve started to slash interest rates.
“The retail CD deposits today are less than retirement deposit accounts balances, which total $480 billion at financial institutions,” said Moebs.
Funds Are Liquid And Ready to Move
Money is likely to move as certificate rates rise, as significant funds have remained parked in liquid, low-paying accounts, like checking, said Moebs.
“The average member who has a lot of money in checking and shares used to have it in CDs. You do not want to lose them,” said Moebs. “So, raise CD rates this summer. These members do not want stocks or bonds, and they have been waiting almost 10 years for better rates. Give it to them this summer.”
Retail CDs are a reflection of savers who shun the stock and bond markets for the security of deposit insurance, said Moebs, who clarified that retail CDs are term-deposits less than $100,000. That’s in contrast to jumbo CDs, which start at $100,000 and include small business term-deposits.
“The significant change in CDs is interest rates, with the retail six-month CD being the most popular term and reflective of the interest rate contrast from 2007 to today,” said Moebs. “The six-month CD average interest rate peaked in August 2007 at 5.40% right before the Great Recession started. A year later when Lehman Brothers went bankrupt, the six-month retail CD rate
Michael Moebs
dropped 29.3% to 3.82%.”
In December 2008, the average six-month rate was 2.18%—a further decline of 42.9% in just three months.
The Moebs study shows retail CD deposits did not flow out of depositories but did move into more liquid accounts such as checking, where balances now total $2.1 trillion, and savings accounts, where balances now total $9.2 trillion. Both amounts are at U.S. historical highs, with $1.3 trillion more in checking and $5.1 trillion more in savings than at any previous point.
CD Market Poised for a Comeback
The study, Moebs said, indicates that the retail CD market can come back.
“This is especially true if the stock market continues its growth and the Federal Reserve keeps increasing interest rates,” he said. “The interest rate paid is the pivotal point for a retail CD comeback. However, the current interest rates paid for CDs show a stark contrast. Six-month Treasury bills are paying 2.15%. Ally Bank is paying 1.00% on six-month retail CDs. Discover Bank is paying 0.65% on the same retail CDs. Yet, the average six-month retail CD is paying only 0.20%. Obviously, the retail CD market hasn’t pivoted toward a comeback, even as the Fed has started to increase rates.”
It comes down to the need for deposit growth, and what is the lowest rate to sustain or improve the amount of deposits, said Moebs.
“Watch the movement of deposit dollars in checking and savings accounts,” stressed Moebs. “And make sure you increase rates high enough, three to six months before deposit growth falls too much or becomes negative, which is just about now for many banks and credit unions.”