The Times are a’Changing… Again
Posted by Jonathan Jackson, CFA, Advisor, Catalyst Strategic Solutions on 4/27/2017

Until recently, the last rising rate period in the U.S. occurred from 2004-2006. Then, the Fed increased rates 17 times, from 1.0 percent to 5.25 percent. That was more than a decade ago, and neither the iPhone nor the Kindle had been released yet.

The world is a much different place now than it was in 2006. Much has changed since the last rising rate cycle. In particular, tools available online for consumers to rate shop and move money from one institution to another have multiplied and improved substantially. How have your credit union’s online offerings changed in the last decade? How have your competitor’s online offerings improved? The competition for deposits is already strong, and that competition is amplified in a rising rate environment.

Member behavior is likely to differ in a world with nearly unlimited rate information available online, combined with convenient online account set up and money movement capabilities. Depositors have struggled through a prolonged period of historically low interest rates, and stronger demand is likely for rates higher than those in previous rate cycles.

The ease with which technology gives members the ability to shop for and acquire those higher rates creates challenges credit unions haven’t experienced in the past.  A decline in members using a branch will make it more difficult to slow share runoff from a credit union’s established accounts. A typical strategy in the past has been to use “back pocket” offers or rate matching strategies to retain high value members. If  members never step into a branch or express their intention to move money away from the credit union, these retention strategies will be less effective.

Credit unions need to have a flexible plan in place to manage share runoff that takes into account multiple rate and liquidity scenarios. Key questions to consider when developing a funding strategy include:

  • What is our credit union forecasting for loan growth? Loan growth will be the biggest driver for deposit needs.

  • How quickly and by how much will we need to increase deposit rates if the Fed continues to increase short-term rates?

  • Will lending rates increase along with deposit rates, or do we anticipate margins tightening?

  • Are our members likely to move money away for a higher rate?

  • Are we likely to attract deposits in excess of what we need?

  • Who is responsible for monitoring share growth, share runoff, and our competitor’s rate offerings?

Will members behave differently in this rising rate cycle? The answer is still to be determined, but having a plan in place to manage deposit pricing will help your credit union navigate the uncertain waters of member behavior in a rising rate environment.

Categories: Business Partners, Education & Training, Financial & Auditing, Strategic Planning & Consulting
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