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Cost of Funds for CUs About to Rise "Credit News 24"

Depository institutions need to plan for higher cost of funds, as higher interest rates cause depositors to shift to higher yielding deposit accounts.

Most Federal Reserve watchers anticipated that the Federal Open Market Committee will raise its target federal funds rate in the fourth quarter and continue to raise rates during 2018 and 2019. The federal funds rate will rise from 1.4 percent at the end of 2018 to 2.7 percent at the end of 2019.

The following graph shows the median projected federal funds rate for the years of 2018, 2018, 2019, and 2020.


According to a June S&P Global Market Intelligence report, the deposit beta is projected to reach 30 percent in 2018. The deposit beta indicates how much of the change in the effective fed funds rate banks pass onto customers." S&P Global Market Intelligence expects the deposit beta to reach 59 percent in 2018.

In comparison, during the last rate tightening cycle, the deposit beta was 41 percent and 62 percent in 2005 and 2006, respectively.


Moreover as interest rates rise, depositors will shift their funds from low yielding accounts into higher yielding deposits. As of June 2018, 73 percent of credit union deposits were in share drafts, regular shares, and money market share accounts; but 18 percent of credit union deposits were in share certificates.


However, a decade ago at the end of the last rate tightening cycle, credit unions reported 58 percent of their deposits in share drafts, regular shares, and money market share accounts, while 32 percent of credit union deposits were in share certificates.


What do you think your deposit mix will look like two years from now?



Title : Cost of Funds for CUs About to Rise "Credit News 24"
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