The FOMC increased the Fed Funds rate by another 75bps last week for a total of 150bps over the last three months, the most aggressive initial tightening pace since 1980. The market expectation is that the Fed Funds rate will continue to rise toward 4%. These aggressive rate moves have bankers concerned that deposit pricing will move even faster than originally anticipated, despite the glut of liquidity in the system.
According to DCG’s Deposits360°® forecasting model, coupled with discussions with clients across the country, financial institutions have exhausted their ability to lag deposit rates any further. In fact, if FOMC continues to push the Fed Funds rate higher we would expect deposit costs within the industry to begin to rise faster than they have in over 15 years.
Back to The Future
The below table is a stark reminder of the average deposit pricing levels observed back in 2005 when short-term market rates began to breach the 4% threshold. This is not to suggest financial institutions should be using these rates as targets, but it may be a foreshadowing of what could eventually transpire in the industry.
Ask The Right Questions
It is important to remember that the depositor holds no loyalty to an institution’s liquidity position and will react to rate incentives accordingly. Address these key questions at your next pricing meeting:
How much of our surge balances are a flight risk as the Fed continues to tighten?
How can we differentiate deposit attrition between a reduction in depositor average balance vs. lost relationship?
When should we offer a special – and if so, what term/rate? Do we have a shelf product?
What’s the marginal cost of funds on raising existing rates vs. letting some deposits leave?
With the spread between 1Y FHLB and new CD originations now over 2%, competition will soon heat up… what can we do to get ahead of this while minimizing cannibalization?
Darling Consulting Group continues to help address these difficult questions with our Deposits360°® solution. If you are interested in sharing deposit strategy ideas or would like to learn more about how Deposits360° can be your tool to optimize growth strategies, please contact Joe Kennerson at jkennerson@darlingconsulting.com.
Learn more about DCG's Deposits360°® solution.
ABOUT THE AUTHOR
Billy Guthrie is a Managing Director at Darling Consulting Group, working directly with financial institution executives to validate and better understand key deposit assumptions utilized in risk models. In addition to supporting core deposit study analyses, he also educates DCG’s client base on utilizing data analytics to support strategic deposit decisions through Deposits360°®, DCG’s proprietary tool.
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