Michael Moebs, Moebs $ervices
LAKE FOREST, Ill—Checking balances across all FIs totaled $1.7 trillion at the close of Q2—more than three times the amount of money invested in retail CDs ($472.8 billion), a new study shows.
Moreover, the report from Moebs $ervices reveals that deposits in interest checking ($508 billion) have now surpassed retail CDs.
Banks and credit unions have been watching this shift, but the Moebs study shows the dramatic nature of the change—in 2008 checking deposits totaled $623 billion ($317 billion in interest checking) and retail CDs $1.2 trillion.
The reversal in consumer savings habits—dropping retail CDs from 14.0% to 3.8% of the money supply, has impacted lending, said Michael Moebs, economist and CEO at Moebs $ervices.
“Long the backbone of bank and credit union lending, retail certificates of deposit balances were exceeded by interest checking interest balances in the second quarter of 2015,” said Moebs. “These term deposits of less than $100,000, retail CDs have been losing consumers’ interest since the Great Recession started in the third quarter of 2008. The American consumer and small businesses, the source of these deposits, now prefer interest checking – a short term focus.”
This continuing decline in retail CDs is a main reason lending is slack, Moebs said.
“Before the Great Recession, retail CD total deposits were 2.5 times larger and represented 14% of all money supply deposits. These short-term deposits are one of the primary sources of lendable funds to business and consumers. Today retail CDs are only 3.8% of the core needed to lend,” he said.
The Moebs $ervices Study of Retail CDs shows low interest rates and “archaic designs” are reasons for the decline.
Term Key Reason For Shift In Deposits
Retail CDs have declined $728.6 billion, or over 60%, since the first half of 2008. While the balances have stayed with depositories, retail CD deposit dollars have shifted substantially to savings deposits, particularly money market deposit account (MMDAs) explained Moebs. MMDAs have increased more than 194% since 2008. The MMDA increase in deposits has come from retail CDs, jumbo CDs, money market mutual funds, and a massive influx by the very small investor retreating from the stock market.
Interest on the six-month retail CDs, the “mainstay” of the retail CD portfolio, was approximately 3% in June 2008 and now hovers at 0.25%. MMDAs interest rates are less than 0.25%. However, the term is driving the huge move into MMDAs, said Moebs. The early withdraw penalty imposed by banks, thrifts and credit unions is seven days loss of interest for a MMDA, while 90 to 180 days for the six-month retail CD.
“The American consumer and small businesses want to keep their money short and liquid while waiting for the day when higher interest rates come back,” said Moebs. “Financial Institutions faced with large amounts of very liquid funds, which can move out of their institutions in a week or less, are very hesitant to lend.”
Deposits Moving?
Bank and credit union lenders do not want the risk of deposit prices increasing, nor deposits moving, insisted Moebs. “Lenders are risk averse when it comes to asset and liability management. The Federal Reserve is the fall guy in this mix of deposit shifting, ultra-liquid funding, and reluctant lending mix.”
Since the third quarter of 2008 to today, the Federal Reserve has increased money supply by only 3.5% year over year, said Moebs.
“For the prior 50 years the Fed grew the money supply at 7.4%. Growth whether in deposits, loans, or eventually in GDP will not be normal if money supply—the fuel to drive the monetary engine—is cut in less than half,” explained Moebs. “Increasing retail CD rates, or the more core rate of overnight Fed funds, puts the cart (price) in front of the horse (money supply) and is not the solution.”
Massive CD Redesign Coming
Moebs said the format of the retail CD has not changed since the “de Medici family designed it in the 1400s when they structured what is modern banking. The retail CD pricing of principal plus interest at maturity or periodically does not represent the market. The U.S. Treasury has not used this design in the T-Bill market for decades. Banks and credit unions will need to overhaul the design elements of: principal, rate price, early withdrawals and payment of interest before the economy starts to move, interest rates rise and deposit money starts to shift internally or out the door to a new depository.”