Mar 16 2007

Deposit Growth in a Changing Interest Rate Environment

Like most financial institutions, the heart of credit union operations is taking deposits and making loans. Understanding the influences and future movements of deposits and loans is essential to running a safe, sound, and successful institution. To gain a better understanding of the movement in interest rates, we asked Steve Swidler of Auburn University and Christoph Hinkelmann of Nicholas-Applegate Capital Management to study one of the most important issues facing the liability side of the credit union balance sheet: influences on deposit growth.

Swidler and Hinkelmann explain how interest rates affected both the growth and the composition of credit union liabilities over a 12-year time frame. The research team finds that market interest rates have little effect on total credit union deposits. For example, as market interest rates decrease, members shift to regular share and money market deposits, and as regular share, money market, and share certificate rates increase, the shift is toward share certificates. Although these patterns are present for credit unions as a whole, the researchers find significant differences between large and small credit unions in member responses to interest rate changes

The authors also model future deposit growth as a way to understand the relationship between interest rate changes and a particular credit union’s deposits. They discover that deposit accounts for each credit union display idiosyncratic responses to interest rate changes, which generally correspond with their findings from the aggregate industry data.