LOMBARD, Ill.—Credit unions need a two-part strategy to manage through the rising rate environment that’s coming, according to Bill Handel.
The VP of research at Raddon Financial Group says CUs need plans to maintain the deposits they have and to also acquire funds for lending.
“The first thing to do is evaluate what kind of risk you have for deposit runoff in your base,” said Handel, pointing to what he termed “surge balances,” or hot money hiding inside typically stable core deposits. Handel estimates 5% to 10% of the core deposit base could be hot money.
“Credit unions need to examine deposit trends over a long period of time to look for behaviors that are not typical,” offered Handel. “That gives you some idea of how much surge behavior could be in your base.”
Next, CUs should begin to build some deposit retention and acquisition strategies. “These will be around ways to hold onto deposits without pricing up the entire deposit base. This means layering deposit options—multiple types of accounts within a product category. So not just having one savings account or one MMA.”
Handel says the approach allows the credit union to pass on a higher rate to some accounts to satisfy those who are rate sensitive, rather than raising rates across all deposit offerings.
Bill Handel, Raddon
“You need to provide options to your members, so if they begin to shop rate they have an option to stay with you,” said Handel.
The “big mistake,” said Handel, would be to simply increase rates with the market across all deposit categories. “There will be more margin pressure, not less, in 2015.”
Handel warned that the typical ALM model tells CUs that they will benefit from a rising rate environment. “But that is based on the assumption that behavior in deposit categories follows what your ALM model suggests. And if you have a lot of surge activity in your base you may actually be negatively affected by rising rates from an ALM perspective. That is why it is important to have options for your members who are rate sensitive.”
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