Charge for Deposits? Not Likely, CU Experts Say
Would your members pay to make deposits to their credit union share accounts? That’s a question that soon may be up for debate depending on what happens at the next Federal Reserve Board meeting.
The continued sluggish economic recovery is causing the Fed to consider policy changes designed to better stimulate the economy. The Fed’s Open Market Committee discussed several scenarios at its Oct. 29-30 meeting, including cutting the 0%-0.25% rate the Fed currently pays banks and credit unions on the $2.5 trillion in financial institution reserves being held at the Fed.
Several banks already have indicated that if the rate is cut, they may start charging depositors to cover the cost of deposit insurance federal regulators charge them. Some credit union economists argue that a “negative interest” scenario likely will not happen and, even if it does, the impact on many institutions will be limited to nonexistent.
“Talk of cutting the reserve rate has been around for a couple of years and it pops up every now then,” said Dwight Johnston, chief economist for the California and Nevada Credit Union Leagues in Ontario, Calif.
Johnston believes such a change, if it ever occurs, would be a long time coming. “If the Fed does act on it, I don’t see it having a huge impact on credit unions because big money center banks would be the first to test the waters.”
Credit unions with strong loan programs could withstand a cut in Fed rates without having to charge depositors a fee, since they would be able to make up the difference from loan revenues, Johnston said.
Small cash-heavy credit unions, on the other hand, might consider reducing deposits by charging for them as an effective strategy to curb the wrong type of financial growth, the league economist said.
“A credit union’s response will depend totally on its balance sheet, ” Johnston said. “You can’t shrink your way to long-term growth, but you can do so from time to time to preserve your capital and increase net earnings.”
Many don’t think the Fed has any intention of cutting rates to stimulate growth. In fact, such a move would be detrimental to the overall market and consideration of it little more than sabre rattling by an agency charged with stimulating economic growth, according to Brian Turner, director and chief strategist for Catalyst Strategic Solutions, part of Catalyst Corporate Federal Credit Union in Plano, Texas.
“The problem the Fed has is that economic growth, especially consumer spending behavior, is not rate-sensitive,” Turner said. “Members continue to suffer job insecurity and have been curtailing their spending, particularly on big-ticket items such as cars, homes and appliances, all items to which credit unions extend financing,”
The final verdict on this and other potential measures may be discussed at the Fed’s upcoming meeting Dec. 17-18. Until that time, experts can only speculate on how the Fed’s next steps will affect their institutions.