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The CD Takes On New Life As Rates Rise

This Month in Retail Banking

Certificates of deposit (CD) are taking on a bigger role at many institutions that want to lock in deposits before rates rise further, according to the latest data from the CDA Consumer Executive Summary. 

Financial institutions are adopting a wide array of strategies when it comes to CDs, with the product representing as much as 74% of acquisition at some providers. Still, the average portfolio has less than 10% of balances in CDs and even the most aggressive banks have roughly 20% of balances in CDs. (See Figure 1.) Roughly a third of all portfolio balances are now above 250 basis points, a steep increase from just a few months ago. 

Figure 1:

Source: Curinos Comparative Deposit Analytics (CDA) | Note(s): Simple average displayed. CDs include all terms. Excludes online banks. Includes only retail deposits. Quartiles calculated monthly based on CDs as a share of overall portfolio or acquisition balances.​

The rise in CD rates is contributing to higher deposit betas amid a continued increase in customer churn. Curinos expects betas to continue rising even if the Fed slows its pace of increases and reaches a plateau. The Fed’s decision to raise rates just 25 bp in early February indicated a potential plateau is near, but the outlook remains a bit muddled due to unexpectedly strong job growth that could cause the Fed to keep boosting rates in a bid to tamp inflation. 

In any case, even a Fed rate plateau will create a set of challenges in the industry. That’s because betas typically continue to increase even after the Fed stops raising rates. As a result, betas, which were initially slow to rise last year, will likely accelerate. 

That said, it seems most institutions are following the market’s bet (as seen in the inverted yield curve) that rates will start falling toward the end of the year; rates on short-term CDs are now higher than those that have longer terms. 

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