It’s no secret that since the credit crisis began banks have seen their core deposit portfolios inflate – significantly. From December 2006 to December 2012 checking accounts have more than doubled from $787 billion to $1.585 trillion. Savings and Money Market accounts have seen similar increases (see graph #1). For a time this huge increase was a tremendous boost for banks allowing them to lower their overall funding costs. Unfortunately rates on these accounts are as low as they can go. Any gains in margin that came from the higher volume of low cost accounts is starting to evaporate as margin pressure comes from the other side of the balance sheet. The higher core deposit volumes are also causing bankers to wonder how the dollars will behave when market interest rates begin to rise again. Will the money stay or will it go? How sensitive are these core accounts?
Last April at SNL’s Community Bankers Conference several presenters addressed the issue of core deposit sensitivity:
Scott Hildenbrand, managing director at Sandler O'Neill, said at the recent SNL Community Bankers Conference that banks need to consider the possibility that deposit outflow could occur when interest rates rise. He said that the results of virtually every interest rate risk model show that a given bank has a strong deposit base and the ability to fund loan growth through a rising rate environment. Banks have simply gotten comfortable with their current and projected liquidity levels, he said. Hildenbrand suggested that banks assume that some amount of deposits flow out of their institution though, particularly given the tremendous growth in funds held in money market accounts that has occurred since 2007. SNL data shows that the banking industry's overall deposit base has grown more than 26% since the end of 2008. Regulators are focused on the issue. Thomas Dujenski, regional director of the Atlanta region at the FDIC, said at SNL's event that banks should be asking what will happen to not only the asset side of their balance sheets if rates were to rise, but also the liability side of their balance sheet.
SNL Street Talk | April 19, 2013 | Nathan Stovall
Most in the industry believe that banks will indeed experience a change in deposit mix when rates start to rise. Customers in search of higher returns will be less inclined to simply park their money in checking accounts. And, given this extended period of low interest rates, even a small change (perhaps by +25 or +50 basis points) may start money moving out. The question is how much?
One way to get a good picture of the change in deposit mix is to look back at the last three rising rate environments. In the 4th quarter of 1993 bank’s deposits were spilt 62% in checking & savings and only 38% in CDs. After a +250 bp rise in Fed Funds the split was more even at 56% checking & savings and 44% CDs. From the 4th quarter of 1999 to the 4th quarter of 2000 the shift was similar although not as pronounced. Prior to the rate rise, 54% was in checking and savings; afterward that dropped down to 52%. The same sort of shift happened again starting in the 4th quarter 2004 when bank deposits were split 59% checking and savings to 41% CDs. After an increase of +375bp in Fed Funds by 4th quarter 2006 the breakdown was 52% checking and savings and 48% CDs.
Clearly the significance of the shift in mix was impacted by the timing of the rate change. You can see the shift from 1999 to 2000 was pretty minor (short rate cycle). The change from 1993 to 1995 was more significant (longer rate cycle). If history is our guide then it suggests a more significant swing in deposit mix than we’ve seen previously. As of December 2012 the split was 64% checking and savings to only 36% in CDs. If we assume a shift in mix back to an average level then we could see checking & savings as a percentage of total deposits drop back down to 53% ((56+52+52) div 3). That’s not terribly scientific I know, but the potential shift seems like it could be significant. How significant? Let’s consider a typical $250MM community bank with a loan-to-deposit ratio of 70%. What is the change in deposit mix assuming no additional balance sheet growth? A shift from 64% checking and savings down to 53% means that around $24MM moves from checking and savings into CDs.
That sounds MUCH more expensive.