LAKE FOREST, Ill.—There is a new stake in the deposit ground and rates are shifting—not simply due to the Federal Reserve’s 50 BP rate cut—one economist is saying.
“If anyone wants a loan of any type – consumer or business – they will pay more,” said Michael Moebs, economist and chair at Moebs $ervices. “The price for deposits has gone up, and deposits fund loans. Costs are critical to the rate equation.”
Moebs cited historical deposit costs measured by interest expense to assets (see chart).
“Deposit interest expense has grown 6.5 times for banks and 2.8 times for credit unions since the end of the Great Recession in 2015,” noted Moebs, who said the numbers make it clear that banks have been more aggressive with deposit pricing in recent years.
2023 Marked Shift
Moebs said 2023 marked a significant shift in the difference in interest expense between banks and CUs.
“This shift is extremely significant, because it signals a major competitive move by banks to protect their turf and go after credit unions deposits,” explained Moebs. “The banks have finally figured they have a competitive advantage over CUs and are exploiting it.”
Moebs pointed out that competitive advantage is assets per employee. Banks have $11.4 million assets per employee. CUs have $6.5 million.
“Banks with less payroll cost than CUs use this efficiency to price deposits higher,” Moebs said.
However, there are exceptions to this rule, noted Moebs.
“Moebs $ervices has compared asset per employee for 3,604 financial institutions and found some CUs with better asset per employee than banks, and they price better than banks with both having good capital-to-asset ratios as well as net-income-to-asset ratios,” stated Moebs.
Moebs pointed out what has been driving the war for deposits.
Michael Moebs
Day Deposit Pricing Changed Forever
“March 10, 2023, is the day deposit pricing changed forever,” said Moebs. “Silicon Valley Bank in San Francisco failed, and every deposit was returned to all depositors above and below deposit insurance limit of $250,000. And the same was done for several other banks. The basic customer or member learned deposit insurance was not necessary since the Federal Reserve would step in and save each depositor’s funds large or small.
“So, each depositor said, ‘I go where I can get the best rate,’” continued Moebs. “If banks, credit unions, thrifts, and fintechs could not provide the best rate, the saver said, U.S. Treasury securities will work, too, since the Fed is part of the U.S. Treasury and often provide better rates than depositories. So, what’s a depository to do? Offer market rates or see their funds walk out of the door.”