November 11, 2023 / VOLUME NO. 287

Rate Reset Looms for CDs

After the fourth or fifth increase in interest rates in late 2022, consumers got more serious about seeking a better return on their savings. That led banks and their customers back to a deposit product that last saw its heyday in 2007 — before the 2008-09 financial crisis, when interest rates dropped from north of 5% to effectively zero.

That product? Certificates of deposit, which let the customer and the bank lock in deposits for a specific rate and term, anywhere from months to years. The customer gets more yield, and the bank gets protection from further rate hikes.

But now, many of the CDs issued late in 2022 are due to mature in an even higher rate environment. And those customers could expect an even higher rate.

The data analytics firm Curinos recently analyzed CD maturities using data from 50 institutions that ranged from roughly $5 billion to $1 trillion in assets. Their analysis projects that approximately $85 billion in CDs will mature at those banks over the next three months, peaking in January 2024. The majority of those will mature for the first time. 

Many of those customers have never held a CD before, says Adam Stockton, managing director and head of retail deposits at Curinos. “There was a brief spike in CDs in the prior rising rate environment [from] 2016 to 2019, but it’s really been since 2007 that we’ve seen CDs at this volume.” CDs made up almost 20% of banks’ consumer deposit mix as of July 2023, according to the Curinos analysis.

As these CDs mature, appropriate pricing will help banks retain customers while also being responsive to profitability pressures in an uncertain rate environment that could see higher rates, a plateau or an eventual decline in 2024. No one really knows. 

Banks should consider how they’ll work with renewing customers, says Stockton, and when promotional rates are appropriate. They should also pay attention to pricing variations across their geographic footprint.

Before the financial crisis, “those are all things that deposit product managers thought about every single day because CDs had been part of the environment for so long,” says Stockton. “There are a number of tactical pricing best practices that institutions haven’t had to use in a long time.” 

Today’s bankers will have to build strategies that balance interest expense with customer retention. Consumers can now move money in an instant, but many CDs can’t be renewed online, says Stockton.

For younger bankers who entered the industry over the past 15 or 20 years, this is new ground. But seasoned bankers may want to dust off and adapt their old, pre-crisis deposit strategies for the modern era. 

• Emily McCormick, vice president of editorial & research for Bank Director

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