Deposit rates unpredictable as rates keep rising

As interest rates continue to move up, no blanket predictions can be made about the near- or long-term behavior of non-maturity deposits at financial institutions nationwide. Moreover, deposit behavior will vary significantly among product types and institutions, depending on a bank or credit union’s customer base and product mix.

These are the two main themes of a presentation being given June 11 by representatives from MountainView Financial Solutions, a Situs company. The presentation is being given by Della Zheng, director of analytics, and Anthony Eramo, managing director, at the Financial Managers Society (FMS) Forum in Orlando. The educational event for finance and accounting professionals from community banks, thrifts and credit unions is produced by FMS.

Deposits provide the funding for loans and other assets, so financial institutions need accurate expectations of deposit lives to match with their assets. While loan prepayments generally go down when rates are rising, retaining and properly pricing deposit products becomes more difficult.

“The question being asked across the banking industry is how deposits are going to generally behave, and the truth is that nobody knows what’s generally going to happen,” says Zheng. “With that said, by looking at deposits at specific institutions, we can more accurately forecast behavior.”

According to Zheng, there are very different historical behaviors among deposit products and institutions. She explained that checking accounts can be very different from money market accounts, and one institution that focuses more on retail deposits can be very different in terms of the same product’s behavior compared to another institution that focuses primarily on business customers.

In his interaction with clients, Eramo says he emphasizes the importance of knowing the lives of each category of their deposits for liquidity planning and identifying surge balances. “A liquidity problem is like a heart attack – it can kill you immediately,” he explains.

In a potential signal of a regulatory focus coming out of a historically low rate environment, Eramo said the current overall sentiment he has heard from banks is that regulators are starting to ask more often for the backup behind assumptions on lives and betas for non-maturity deposits.

With all of these considerations in mind, MountainView is advising clients to obtain an institution-specific study of deposit behaviors. Given the uncertainty ahead, institutions need a forecast now more than in a normal economic environment. A scenario analysis will ultimately be a guide that sets pricing strategy going forward.