We recently compiled a new research report,"Likely Scenarios of Rising Deposit Rates in 2014 and Beyond,” which draws from 25 years of cumulative data here at MRI to consider the future of deposit rates based on past performance. This article was written by Dr. Dan Geller, executive vice president for Market Rates Insight, for this BAI Banking Strategies about some of his research findings.
Sometimes it is helpful to step away from the daily grind of interest rates, product development, and pricing decisions and to look at the big picture. What actually happened with deposit balances throughout the last 10 years and what does that portend for the future?
Let’s imagine six good deposit friends gathered to reminisce about what they went through in the past decade. “I feel like I have not grown at all in the last 10 years,” says Short-Term CD. “When I look back, I was nearly at the same level as I am today minus inflation.”
Mid-Term and Long-Term CDs say they feel exactly the same. The three CD friends look at the chart and confirm that they grew by between 20% and 25% during the period, which does not count for much; after discounting for the annual inflation rate of between 1.5% and 2.5%, they are nearly where they started in 2004.
“Speak for yourself,” says Liquid Funds. “We actually had a tremendous growth spurt in the last 10 years, growing by between 50% and 55%.”
One of the term CDs then points out that most of Liquid Funds’ growth occurred after the recession that started in December 2007. “That’s right,” says Liquid Funds. “That was the time when some of you, who are always looking for commitment, were not very attractive.”
He was talking about Short-Term CD, which fell 50% in the wake of the recession while Mid-Term and Long-Term were both up by about 40%. At the time, it was fashionable among customers to seek Mid-Term and Long-Term commitment in the expectation that interest rates would fall during the recession.
“Now that the recession is officially over, are we all back to being popular?” the CD group asks in unison.
“Unfortunately no,” says the know-it-all Liquid Funds. “In the past year, all of you shrank by between 5% and 14%, especially Long-Term CD. It looks like long-term commitment is not very appealing nowadays. By comparison, I’ve gained between 5% and 7% in the past year.”
“Well,” says Long-Term CD, “it’s true that I’ve been up and down in the last 10 years. But I always kept a positive attitude knowing that everything in life is cyclical and one day soon we will return to the glory days when long-term commitment is appreciated and rewarded. At some point, everyone will realize that hopping around is not as rewarding as making a long-term commitment.”