One Impact of Reg E Is Lower Deposit Rates, Says Analyst
With the July 1 Reg E deadline already come and gone and the Aug. 15 deadline fast approaching, one analyst said financial institutions are recouping lost noninterest income by lowering deposit rates.
Dan Geller, executive vice president of Market Rates Insight Inc., said data already proves that consumers will see a lower rate on deposits as a result of Reg E.
In the first week after the July 1 deadline, Gellar said there was a sharp and sudden drop in the national rate on deposits. A July 12 MRI analysis showed a drop of 0.06% in rates. For the past six months the rate in deposits has been dropping at a rate of 0.01% every two weeks.
The drop in interest rates was higher for long-term CDs. Forty-eight month CDs dropped 0.13%, 60 month CDs dropped 0.07%, 30 month CDs dropped 0.05%, 36 month CDs dropped 0.03% and 24 month CDs dropped 0.02%, according to MRI.
"This was a very unusual downward turn about 12 times the normal rate of decline," Geller said. "We are in a decline state, but this is a much more substantial drop than normal."
After analyzing the decline, Geller added that there are no other factors linked to the decline other than cutting interest expense to make up for the loss of fee income.
"I am confident there is a strong relationship between the two," he said.
Mike Schenk, vice president, economics and statistics at CUNA, said that although he hasn't heard anyone specifically say they are lowering deposit rates to deal with losses in noninterest income, deposit rates in general are down. However, he pointed out that credit union rates are still higher than many other institutions' numbers.
When the Aug. 15 deadline passes, Geller predicted that instead of another sharp decline, deposit rates will undergo a gradual decline.
The typical relationship model, Geller added, shows that when rates decline deposits also decline, but the current situation goes against the model-deposit rates are continuing to increase as interest rates are declining.
"The decision to put money in deposits among consumers is emotional rather than rational," Geller explained. "Consumers are looking for safety and soundness rather than return. Financial institutions are a business. If you see the same result at a low cost you will gravitate toward that option."
Even though financial institutions will continue to see high deposit rates despite the drop in rates, Geller said that alone will not be enough to help institutions recoup from lost noninterest income.
The drop in deposits, as of now, will cover approximately one-third of the loss, he said. Institutions will use a combination of tactics to recoup the full loss, such as introducing new fees, Geller added.
Schenk said it is still a little too early to put exact numbers on losses from Reg E, but said there has been and will be a cost not just with Reg E but also with the recently passed interchange legislation.
"There is a tremendous amount of pressure on noninterest income and there will continue to be that pressure going forward," he added.
However, the good thing, Schenk said, is that all financial institutions are in the same boat.
As far as possible tactics to deal with losses in noninterest income, Schenk said financial institutions will probably implement a combination of cost-cutting and pricing changes.
"The bottom line is that I think consumers will still continue to see the difference between mainstream financial institutions and fringe financial institutions and they will continue to see the substantial difference between credit unions and for-profit institutions," he said.
When the impact of Reg E does start to become apparent, Schenk said it will not be visible across the board.
"In regards to overdrafts there are some institutions that have a reliance on it and there are others that it is sort of their bread and butter and without it they will have to make drastic changes," he said. "We won't be able to see the impact right away and it will be lumpy and not across the board."