It is easy to generalize what rising interest rates mean to a financial institution’s risk management plan, but the current rising rate environment is somewhat different and has a few unique features that may alter risk management decisions for banks and credit unions.
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.
When it comes to deposit behavior when interest rates are rising, there is no crystal ball. The impact of rising rates is wrought with uncertainty. Conventional wisdom suggests that if interest rates rise, there will be a drop – or slowdown — in deposit growth. The basis of this logic is that as market rates rise, financial institutions won’t increase deposit rates as much — that is, their deposit betas are less than 1 – and that will lead to fewer deposits. While there is truth to this view, there are other nuances and factors to consider, specifically relating to risk.