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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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NCUA's Interest Rate Concerns and Possible Impact to Savers


The NCUA is worried about what will happen to credit unions when interest rates finally start to rise. In January the NCUA Board announced rules to ensure certain credit unions have written policies addressing interest rate risk. The primary concern is that mortgages now make up a larger percentage of credit union loans, and those tend to be long-term loans. On the deposit side, the percentage of deposits in money market accounts have grown while the percentage in regular share accounts have fallen. The NCUA considers money market accounts to be more sensitive to interest rates. In other words, members will be more likely to move their money to other institutions for higher rates. Should interest rates rise, credit unions may have to aggressively increase their money market rates to retain those deposits. However, the credit unions will be stuck with long-term mortgages with low fixed rates. This could result in what they call net interest margin compression which will negatively affect their financial health.

The NCUA chief economist discusses this interest rate risk issue in the second half of this NCUA video (7:30 into the video).

One thing I found interesting is a pie chart showing the composition of deposits (10:47 into the video). It shows how the composition has changed from 2001 to 2011. The percentage of money market accounts has grown from 16% to 23%. Regular shares (savings accounts) percentage has fallen from 34% to 30%, and share drafts (checking) percentage has remained the same at 12%. The percentage of deposits held in share certificates (certificates of deposit) has fallen from 27% to 25%.

Many of us savers who invest in CDs have been worried about how credit unions and banks may treat CD holders when interest rates eventually rise. With the recent cases of credit unions increasing early withdrawal penalties on existing CDs, it seems likely we'll see more credit unions try this when interest rates start going up. Even more worrisome is if the institutions refuse to honor early withdrawal requests. As I described in this blog post, some institutions give themselves the right to refuse withdrawal requests before maturity.

It doesn't appear that the NCUA is overly worried about CDs since their percentage is only a quarter of total deposits. One thing not described in the NCUA pie chart is the term composition of the CDs. How much of the deposits are in long-term CDs vs. short-term CDs? Early withdrawals are more of a concern on long-term CDs.

Based on what I've seen in credit union call reports, most deposits are in short-term CDs. I just checked the NCUA call reports for Navy Federal Credit Union, the largest credit union in the nation. The call report showed total deposits of $33.6 million. Only 8% of those deposits were in CDs with terms over 3 years. For terms from 1 to 3 years, the percentage of deposits was 11%. It should be noted that Navy Federal has a long history of very competitive long-term CD rates. So these percentages will probably be less for the average credit union.

Since long-term CDs don't make up a large portion of deposits, long-term CDs may not be a major concern for credit unions and banks when interest rates rise. So we may not see a lot of unfair restrictions being imposed on CD holders (like early withdrawal refusals and larger penalties).

One concern that I get from the NCUA video is that it may be a slow process for banks and credit unions to increase deposit rates when interest rates finally start to rise. Due to all the low-rate mortgages, institutions will be under pressure to delay increasing their deposit rates.

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me1004   |     |   Comment #1
This report actually highlights something I have written about in the forums previously: the grave danger to banks and CUs going forward due to the duration of the Fed's low interest policy. A huge amount of housing loans of up to 30 years will be locked into very low rates. Yet, the banks and CUs make their money off the spread between what they are paying out in interest on savings accounts and CDs and what they are taking in in interest on loans. The duration of the Fed's low interest rates is drastically changing the balance for the long term. Simple math tells you the banks simply can't raise savings rates very much or very fast without undermining their financial stability. 

So, is this going to  mean that regardless of Fed policy, the banks will not be offering what might be considered normal rates for many years to come? The Fed does not plan to raise rates until at least the end of next year, meaning six years at these lows. Will it take just as long or longer for the banks to unwind and rebalance their loans and savings before they can get back to normal savings rates?

Of course, it is never quite this straight forward. I suppose they could sell off their low-interest rate loans, maybe in packages of marketable derivatives for investors -- the very practice, of course, that helped create this economic crash in the first place, but hopefully this time a little more honest. If they can get these low-rate loans off their balance sheets, then they could higher savings rates. Yet, could they actually sell off these low rate loans? Who would want to be locked into that? It would be a losing proposition going forward for an investor as rates rose. Or, are they selling them off now, while they can, as fast as they are taking them in -- it would be interesting to see statistics on that -- and maybe that is the kind of plan the NCUA is looking for. 
Anonymous   |     |   Comment #2
I suspect the situation as described above will encourage a lot of new banks and credit unions, none of which will have the over-hang on their balance sheets of a lot of very low rate, very long term mortgage, etc. debt.
jujubee   |     |   Comment #3
I think there is cause for concern, but for a slightly different reason.

Most banks and CUs sell off most of their long-term mortgages to Fannie Mae or Freddie Mac. Very few institutions hold lots of 15-year or 30-year mortgages on their balance sheet. If there is one thing that most people in finance remember from the S&L crisis of the 80s/90s it's that having a significant mismatch between your deposit duration and loan duration is very risky, and should be avoided. Thus, the loans are sold off.

However, the institutions need to put that money SOMEWHERE, and if they don't have loans to originate (and hold), they need to buy securities. Like treasuries - or mortgage bonds from Fannie and Freddie.

When rates start to rise, the value of those bonds is going to drop like a rock. I suspect this may cause undercapitalization problems for many financial institutions and we'll have something like TARP II to prevent a whole new wave of bank closures.
Patty   |     |   Comment #4
According to the this Reuters' article of 4-4-12 foreclosures have picked up since the "robo-signing" scandal has been settled. Even more of the 'good' mortgages are underwater as the economy tanks and more people are unemployed or underemployed. 

This does not factor in the huge student loan debt with useless degrees. That group in better times would be buying a house, gettting married and starting a family. Nor does the article factor in places like Detroit and Flint, MI wanting to tear down 1/3 of their cities to reduce the burden of police/fire departments in almost empty neighborhoods or what to do with condo towers that are mostly empty.

IMO interest rates and other things will not get better in a very long time. 

Americans brace for next foreclosure wave  

Anonymous   |     |   Comment #5
I don't know why there's so much "hype" about Credit Unions instead of Local Banks.  In my area, the CD interest rates paid by a few community banks greatly exceed the local credit unions.  It's very sad the Credit Union aren't living up to their promotions about being better for its' members than banks.
Anonymous   |     |   Comment #6
Patty-great post. So right!
Anonymous   |     |   Comment #7
Perhaps 33 billion in deposits not million?
Anonymous   |     |   Comment #8
I agree with the Poster above. Most Credit Unions in my own local area currently have CD rates as low as, or (many) even lower than the Community Banks. Other than the few (Nationally available) Credit Unions paying competative rates, the Credit Union "philosophy" is not currently working.
Ryan   |     |   Comment #9
I have all of my money in several credit unions and it far exceeds what is available interest wise at banks. 

My residence is in a large city with many credit unions and most of the local ones don't pay good rates.  However, by using this site I have been able to find nationally available credit unions that offer great rates.  I remain locked into those certificate rates as I've been following this site for a few years.

Thank you to the webmaster for offering this wonderful user friendly site.
Truthseeker   |     |   Comment #10
The answer to low rates, for experienced investors, is NOT to hope and pray for higher rates. It is to buy gold, silver and platinum. Forget banks and credit unions. The only type of account you should have is a liquid one. Earn money and then convert it as soon as reasonably possible, by using the fiat to buy precious metal. The dollar, Euro, pound, yen, etc. are all doomed to deep debasement by desperate governments.

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