Deposit Rates Could Turn Negative in This Bizarro World
Forget the debate over whether or not a credit union should keep offering free checking accounts, there are signs credit unions may eventually have to decide whether or not to charge their members fees for holding deposits.
The reasons why they might have to take this step rests in the upside down finances that characterize the U.S. economy right now, where the costs of liquidity are so low as to almost be free, but the demand for loans and investment returns remain so soft they bring in almost no income.
The result, according to Dan Geller, executive vice president of Market Rates Insight, is that deposits in insured financial institutions, whether banks or credit unions, will likely become something of a hot potato, he said, using the term to represent something that might in another time be welcome and sought but in the near to medium term will become an expense and a regulatory problem.
Back in November, Geller predicted that a major bank would begin to charge depositors for deposit accounts of over a certain size and earlier in August, the Bank of New York Mellon sent a letter to institutional depositors informing them that the bank would begin to charge fees on deposits above $50 million.
And Geller believes that while the trend might have started with the BNY Mellon in a specialized niche of a relatively narrow market, it will spread to retail banking as well.
Issues that Geller believes will fuel the trend include the fact that banks and credit unions pay to insure deposits with the FDIC or the NCUSIF and Geller's belief that the price of liquidity is likely to continue to fall as the economic slump continues.
Geller noted that the Riksbank, Sweden's central bank, lowered its fund rate to negative 0.25% in 2009 in an effort to reduce the costs of liquidity to zero. Faced with free liquidity, Geller pointed out, “why would any bank opt to raise money in the retail market and pay for it?”
He said that the Bank of England and the Federal Reserve are both watching the Swedish experiment.
“Would consumers be willing to pay 25 basis points to insure their deposits?” Geller asked. “Normally, no. But these are not normal times.” he said.
In normal times, Geller contended, investors and consumers make money management decisions based in a ratio that is roughly 80% greed and 20% fear. But in troubled economic times, the ratio is reversed and consumers and investors begin to make decisions predominately according to fear. These fears, he suggested, would lead some consumers to pay for insurance protection for their assets.
Geller's advanced degree is in business administration, but economists consulted about his prediction joined in his expectation. Bill Hampel, chief economist with CUNA, said that both banks and some credit unions may wind up charging fees for taking some deposits or having deposit balances of over a certain amount.
But where Geller cited the costs of liquidity as a chief reason, Hampel noted the shrinking spread between the costs of funds on deposit and the income available from retail lending or investments for the trend should it develop.
“It’s really pretty basic,” Hampel explained. “In the traditional model, you take in money at a certain rate and then lend it out or invest it at a higher rate. But as loan demand has continued to drop and as investment returns have plunged, that spread has gotten very thin and that makes it very difficult to fund the operation going forward.”
Hampel also agreed with Geller's point that that more deposits also carry a regulatory burden in the form of a higher capital requirement and an additional cost in the form of deposit insurance that also has to get factored into the calculation.
But credit unions said they didn't have any plans to charge for deposits–at least not yet, though several said they had become very aware of the problems deposits were beginning to create.
Donna LoStocco, vice president of member experience at Affinity Credit Union, a 140,000-member credit union headquartered in Basking Ridge, N.J., acknowledged that the front-line staff at the credit union had been aware of the problem for some time.
“You don't want to dread the member that comes in with a million dollar deposit, but you do become more aware of it,” she said. The $2 billion credit union had roughly $733 million in its regular share and share certificate accounts as of the end of June, according to NCUA records.
But Richard Chin, treasury vice president for the CU, said Affinity tries not to look at deposits solely as cash coming in but ideally as part of a broader relationship.
“Most of our members have been our members for some time,” he noted. “The likelihood is that they are going to have a mortgage with us or a credit card or some other kind of loans means that they aren't going to just cost us money with a deposit.”
In such an atmosphere, the credit card account could become even more important since it revolves unlike an auto loan and is not likely to get refinanced like a mortgage. But Chin also pointed out that credit cards have a different risk profile and the CU need to be careful not to put all of its loan assets in one basket.
Greg Smith, CEO of the 378,000-member Pennsylvania State Employees Credit Union, said his $3.8 billion credit union had no plans to charge for deposits but could empathize with credit unions that were facing economic pressure from their deposits.
“It's a tough place to be in when your loans and investments are earning less but insurance premiums on deposits are headed to between 12.5 basis points and 25 basis points,” Smith said. But he also observed that for the CU to start charging for deposits, it would first have to see its deposit rates diminish sharply since the CU is still a leader in its market for deposit rates.
“The first thing we would do to discourage deposits would be to drop our deposit rates, which is what our market has been doing overall as well,” he said. The $3.8 billion PSECU had roughly $1.4 billion in shares and share certificates on deposit as of the end of June.
Brian Clark, chief financial officer at the 186,000-member Bethpage Federal Credit Union, headquartered in Bethpage, N.Y., agreed, noting that the CU's money market rate was still at 90 basis points and it’s certificate rate is 2.30%.
“Theoretically, I can see where that [charging fees for deposits] could happen,” Clark said, “but we are so far from that it’s not really something we consider,” he added.
Jim Blaine, CEO of the 1.7 million member State Employees' Credit Union, headquartered in Raleigh, N. C., agreed that his CU’s field of membership also helped protect them from a potential flood of deposits.
Oskar Mielczarek, CEO of the 74,000 member Polish and Slavic Credit Union headquartered in Brooklyn, N.Y., takes a different view. Polish and Slavic continues to attract deposits as they are expanding into new markets, where they expect to actively grow their loan portfolio.
Each of the CUs has a very specific field of membership, and Mielczarek said his CU's focus on helping its members struggle through the slow economy had helped keep its lending profile strong.
“We have always had a unique and specific field of membership that we have always served in our own unique way,” Mielczarek said. “Part of that has meant helping them make it through this difficult economy.”