CD Deposits May Keep Falling if Rates Drop
A continued slowdown in the growth of certificates of deposit has some bankers forecasting trouble ahead.
A midyear look by a handful of bank executives last week suggests that the growth slide that began in April may accelerate in the near term if the Federal Reserve Board cuts rates further.
Indeed, during the last week of June consumer CDs grew at an annual rate of only 6.24%, according to the latest Fed data. That’s the slowest pace since last summer, and a far cry from February’s frantic 40.9%.
The slippage in these CDs--with balances of $100,000 or less--diminishes a cheap source of funding that many banks use for consumer and commercial loans.
Should the economy rev up, and stimulate higher loan demand, some banks might artificially prop up CD rates to keep the money flowing in. Or, at the very least, banks might have to seek more costly funds on the open market.
“If loan demand were to suddenly surge, we may be back doing special CD promotions by the fourth quarter or the beginning of the next year,” said R. Philip Altman, a senior vice president in charge of branch administration for Chatsworth-based Great Western Bank.
At the crux is the Fed, which--for the first time in 17 months--loosened short-term interest rates a quarter of a percent on July 6. That decision, some bankers say, signals the beginning of a long hibernation for CDs.
“Right now, there is little appeal for consumers to lock up their money,” said Joseph LaBrie, director of retail product management for Salt Lake City-based Zions First National Bank. “It’s just not enough; the yield curve is flat.”
Zions’ customers have been opting for liquidity, he said, choosing money market accounts and traditional savings accounts over CDs. The move shows that customers are parking their money while they search for better yields elsewhere, he added.
Certificates of deposit grew 10% last month at Zions, the lead institution of $5 billion-asset Zions Bancorp. But its interest-earning demand deposits increased 20%, and LaBrie says that pattern is unlikely to change in the rest of the year.
