LAKE FOREST, Ill.— The era of low deposit rates has officially ended, and credit unions should not think it is coming back any time soon.
That stance comes from Michael Moebs, economist and chair of Moebs $ervcies, who insists deposits need to provide greater value—meaning higher rates.
What is driving the need for elevated rates may not be obvious, stated Moebs.
“The Consumer Price Index (CPI) is a benchmark of value. Gold is equal to the CPI today. CPI measures price change. Gold measures risk. Both determine value,” said Moebs.
He pointed out 10-year Treasury bonds are 33% of CPI/gold value and certificates of deposit are half the value of T-bonds, or 17%.
“Does the American saver truly believe deposit insurance is worth 83% less than the value measured by the CPI/gold index?” said Moebs. “The Federal Reserve, not the FDIC, saved Silicon Bank. Since COVID, the American saver has learned Treasury bills, notes, and bonds have twice the return value of deposits. Depositors are moving to Treasuries for the extra value.”
Moebs said a key question pricing experts at banks, credit unions, thrifts—and even fintechs—must ask is: “How much more must deposit rates rise to decrease deposit outflow to Treasuries and provide a small reserve in gold for a depression risk or severe recession risk?”
“All that glisters is not gold, wrote Shakespeare in the Merchant of Venice. Well, neither deposits nor Treasuries have glistered like gold in the past 10 years,” continued Moebs. “Gold outperformed in value and returned 5.85%, with Treasuries only 33.5% of the gold return and deposits even less at 16.9% of gold. And both were worse when compared to gold’s pal the CPI.”
Moebs said another key question to be asked: “Do deposits and T-bonds have to pay as much as gold?”
“The answer is never,” explained Moebs. “Why? Deposits and Treasuries are backed by deposit insurance and the Fed and gold has no backing.”
However, do rates have to rise?
Michael Moebs
“The answer I always give on deposits is raise the deposit rates high enough to avoid any outflow of deposit dollars, accounts or users because of price,” said Moebs. “This means if a five-year CD averaged 0.99% in the past ten years, this has to double to match the 10-year Treasury note, which averaged 1.96%. Then appropriately portion what the five-year CD rate is to all other deposit rates, even interest checking.”
Establishing A Deposit Rate
Deposit rates are a function of other prices, such as Treasury rates or private sector bond rates, etc., stated Moebs.
“Establishing deposit rates is a process starting with a list of all deposits sorted by amount. Consider the use of deposit balance tiers and adjusting rates higher for users with large deposits. It is critical to know savers with the largest deposits,” he said.
Moebs advised credit unions, and all FIs, to identify competitors with a detailed market share.
“This helps establish pricing parameters to make decisions on how high and low to price to protect and grow deposit share without losing deposits,” he said.
The basic saver is becoming more aware of the value of deposits and other competitors to savings, concluded Moebs.
“Does deposit insurance carry the same level of deposit protection since the Fed has proven it will step in to prevent the failure of a financial institutions? A token of a few basis points on savings is a bygone era,” Moebs said. “Proportionately adjusting rates to get closer to the ‘right rate’ is very important. Gold can influence the adjustment. In a nutshell, depositories need to pay higher rates for deposits. Benchmarks such as CPI and gold can show how high to set deposit rates.”