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Harnessing the Power of Deposits
Wednesday, November 1, 2017 6:25 AM

Aaron Martini, Senior ALM Analyst, Catalyst Corporate FCU

Realize it or not, there is an entire generation that only knows extremely low interest rates on loans. That same generation also only knows near-zero deposit dividend rates. This may present a unique challenge for a financial institution that needs to raise loan rates if they’re forced to raise the cost of funds.  

power of deposits

As the graph above shows, over the past decade, credit union deposits have skyrocketed. While this may seem like fantastic news (an abundant, inexpensive resource that generates income), there’s risk if these deposits become unstable.

Changing demographics presents a significant risk. Medical advancements and better quality of life have improved mortality rates over the past few decades. However, the outlook for longer life expectancies was slightly optimistic. Updates in the last two years have pulled down companies’ estimates of what they’ll owe future retirees, because life expectancies have fallen. This may also reduce projected retiree deposits at your credit union.

So, what’s a credit union to do? For starters, safeguard your credit union from potential funding shortfalls that could leave it exposed to the elements.

Why does any of this matter for deposits?

Inexpensive funding from middle-aged and older members currently is plentiful, but without loan demand from millennials, credit unions may not be able to generate adequate earnings. Many millennials are already delaying major purchases (such as homes), because of the student debt. Raising loan rates may delay these purchases even more.

There’s no guarantee deposits will be robust a decade from now.
It’s possible that over the last decade, your credit union has taken low rates for granted. If so, now’s a good time to take a strategic look at deposits.

What should you look for?
Effective analysis incorporates multiple factors to help determine how long deposits will remain at the credit union. First, track your credit union’s account closures. This is preferred over simply tracking aggregate balance, which may reflect recent economic and demographic trends and hide risk of funding departure. Tracking account closures can provide key insights into when and why people close accounts and alert the credit union.

The most important information gleaned from deposit analysis is a reasonable estimate for retention of funds. For older depositors, especially those with high-balance accounts, it’s best to plan in advance for filling that funding vacancy. Early awareness provides opportunity to reposition strategically. Concern over deposits and membership is a primary driver for the inclusion of liquidity risk management as an exam focus.

Anything else?
Past and present member behavior inform deposit projections, but a forward-looking strategic projection should be the goal of every credit union. It will lead to better liquidity management and better balance sheet management. Deposits are vital to a healthy credit union, and they can’t be taken for granted.

With proactive steps, credit unions have a better chance of seeing and preparing for any storm on the horizon.

Catalyst Corporate Federal Credit Union is a five-star endorsed business partner of Credit Union Resources, Inc., a wholly owned subsidiary of the Cornerstone Credit Union League.