3 Charts to Consider for Deposit Rate Strategies

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If there is one thing that most community bankers, analysts, and regulators have been in agreement with in recent years, it is the consistent projection of imminent rising rates. Well, we know rising rates are finally a reality as the Federal Reserve has raised the Fed Funds rate twice since the end of 2016 and projects an additional five increases over the next 21 months. This has been positive news for many bankers.

Coupled with market optimism around fiscal policy, most loan asset classes have repriced with each fed increase since the Fall:

Source: Stackfolio, Federal Reserve
Source: Stackfolio, RateWatch

But what will this mean for deposit trends at community banks? Here are three charts to explore this question:

Pace of Deposit Rate Increases Lags Fed Fund Rate Increases

During the last rate increase environment that began in the summer of 2004, it took a little over two years for the Fed Funds Rate to reach its peak. However, the pace of increase for interest-bearing deposit rates was much more measured and took over a year longer to reach its peak:

Source: Stackfolio, Federal Reserve
Source: Stackfolio, Federal Reserve
So as banks continue to update their deposit pricing strategies, history suggests a lag should be incorporated into their strategies as to not be too aggressively priced. This point is further illustrated by the BAI:
As the Fed Funds rate rose by 422 basis points from the summer of 2004 to the fall of 2006, the most aggressively priced banks saw their cost of deposits increase by 329 basis points. By contrast, top performing banks saw an increase of only 140 basis points, capturing a funding advantage of 45 basis points per every 100 basis-point increase in the Fed Funds rate.

Consumer Behavior Continue to Shift Online

While a deposit repricing lag may play out similar to what we saw in 2004–2006, consumer behavior on where they place their deposits has definitely shifted since then. Online-only banks and fintech companies have accelerated this trend in recent years with banks still being well-positioned to capture the overwhelming majority of deposits online. 
In the most recent Federal Reserve Consumer and Mobile Financial Services Report, the chart below shows all demographics of bank clients are reporting higher use of mobile banking:

Source: Federal Reserve

Source: Federal Reserve

In addition, a Fiserv report stated that 71% of millennials — the largest consumer demographic — believe mobile banking will transform their banking experience in the future.”

Liquidity Coverage Ratio Pressures Still Subdued

Another aspect that will affect deposit strategies at community banks will be the impact of the Liquidity Coverage Ratio (LCR), a mandate that the Basel III framework imposed on the largest banks in the country. 

As you can see in the chart below, the core deposits (bottom left quadrant) that community banks rely on are also the deposits that will become most valuable to banks under LCR.

However, these pressures have not been borne out yet on community banks. Since LCR’s full implementation in early 2016, community banks have seen their core deposit rates remain stable with balances increasing over that time period.

Source: Federal Reserve, Goldman Sachs
Source: Federal Reserve, Goldman Sachs

Whatever your deposit strategies are, Stackfolio can help.

With more than 300 banks on Stackfolio’s platform facing varying strategic deposit pressures, our Data Research platform is giving them the tools and competitive information to monitor and act on their deposit rate strategies. In addition, our Marketplace is facilitating more efficient and profitable loan growth strategies across varies loan asset classes.

So let us show you how we can empower your institution to strategically manage your deposit rate and loan growth strategies.

About Stackfolio

Founded by Allen Nance and Pavleen Thukral in 2015, Atlanta-based Stackfolio is a fintech startup that uses modern technology to serve a vibrant online marketplace for loan trading between financial institutions. The integrated data research platform helps institutions make sophisticated trading decisions.