It’s been over a year since the Fed last raised rates. Since then, deposit costs have climbed over 60 bps while checking and savings balances have declined 8-10%, according to DCG’s Deposits360°® data covering nearly 300 financial institutions throughout the country. Deposit cost relief is in high demand.
A Fed pivot part deux may provide that relief, but deposit cost reductions will be dependent on how fast the Fed eases. Deposits360° analytics suggest that deposit costs in aggregate will lag in the early stages of a Fed easing cycle. Additionally, we project that the mix change that has caused so much margin pressure through this cycle is likely to slow but continue for the first 100bps of Fed easing. (Check out the latest DCG Deposit webinar for more data insights and strategies.)
Therefore, deposit pressure may continue as we navigate through the early stages of a Fed easing cycle.
Here are four strategies for a proactive falling rate game plan:
1. Act Now: 1-year Treasury rates are down nearly 80 bps from their Q2 peak. CD pricing will follow, and the top rates should drop below 5%. Don’t wait for the competition – act now and test the resiliency of upcoming CD maturities. Furthermore, MMDA and CD spreads have narrowed. Now may be the right time to work on re-balancing the deposit mix.
2. Identify Your First Cut: If the Fed cuts 50 bps by September, how much will you cut your top exception deals? Newer promotional products? Single-sourced CD and MMDA accounts?
3. Prepare Your Comeback Campaign: Balances that moved to money market mutual funds or Treasury Bills will likely see a 100% beta on the way down while the banking industry lags. Compile your data to identify where you can potentially claw back some funds when the Fed starts to cut.
4. Think Full ALCO: Financial institutions will face difficult decisions on whether to lower cost of funds while risking liquidity early in this cycle – at a time when margin pressure is very painful. A full liquidity perspective will need to be in close view, particularly as the current bond market rally on the 5-year point of the curve is likely to lead to lower loan origination rates. It’s important to understand the marginal cost of forgoing a rate cut to protect a small percentage of at-risk depositors.
Falling rates will likely be a panacea to margin pressure, but the pace of that funding relief will depend on preparation. Rely on data analytics to lead strategic decision-making and help find that optimal funding solution.
The Deposits360°® forecasting model is a bottom-up price elasticity solution with data from nearly 300 institutions that enables financial institutions to understand the cost and volume impact of pricing decisions under customized rate scenarios. Learn how Deposits360° can help your institution simulate the impact of difficult pricing decisions and their impact on projected volumes.
ABOUT THE AUTHOR
Joe Kennerson is a Managing Director at Darling Consulting Group. In this capacity, he works directly with financial institutions by providing solutions for their asset/liability management process in the areas of interest rate risk, liquidity risk management, ALM modeling, regulatory compliance, and executive-level education. He is a frequent speaker and author and directly advises clients in all aspects of ALM.
Contact Joe Kennerson at jkennerson@darlingconsulting.com or 978-499-8150 to work collectively to transform ALCO into a profit center.
© 2024 Darling Consulting Group, Inc.
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