Rates on certificates of deposits at U.S. banks have plunged this year, but declining much further is unlikely given that rates have reached levels not seen since the end of the last easing cycle.
CD rates decreased at an accelerated rate in the last few weeks of the first quarter after the Federal Reserve lowered the target fed funds rate to near zero. CD rates have continued to decline since then but at a significantly slower pace in the last few months even as deposits have flooded into the banking system.
Fed data show that deposits at commercial banks jumped nearly 20% between Jan. 1 and Sept. 16, according to the Sept. 25 H.8 release, which tracks balances of U.S. commercial banks. While many institutions seem flush with excess liquidity, banks are trying to assess how sticky those deposits will be since unprecedented government stimulus, funds from the Paycheck Protection Program and historically high savings rates have driven the surge in funds.
Perhaps that is why banks have not completely shunned new deposits, but the rates they offer on new CDs has declined notably. Through Sept. 25, the average rate on one-year CDs, one of the most popular products, has declined 59 basis points to 0.38% since Jan. 3. Fifty-six percent of the decline, or 33 basis points of the decrease, occurred between Jan. 3 and March 27 during the first quarter.
Since the end of the first quarter, CD rates have fallen another 26 basis points, but that decline has occurred at a much slower pace. The pace of decline has slowed considerably in the last three months, with the average rate on one-year CD rates falling just 10 basis points since mid-June.
The pace of future declines, should they come to pass, likely will be even slower as the average rate on one-year CDs at Sept. 25 stood at the same level last seen in late November 2015. At that point, the fed funds rate had been pegged near the zero bound for close to seven years, allowing banks to steadily lower their deposit rates.
In 2020, banks with assets from $50 billion to $250 billion have decreased rates the most on one-year CDs, lowering the average rate by 62 basis points. Institutions in that asset group offer the second highest rate on the product at 25 basis points.
Unsurprisingly, rates on longer-dated time deposits have dropped the most. They tend to follow long-term interest rate benchmarks like 5-year and 10-year Treasury notes, which have plunged by 120 and 110 basis points, respectively, this year. Rates on three-year CDs have fallen 70 basis points and are now below the levels seen in late November 2015.
Banks will also have the opportunity to reprice some of their CD portfolios in the coming quarters. At the end of the second quarter, nearly 70% of retail CDs were set to reprice or mature in the next 12 months.
As rates on new CDs trend down, the products have become smaller portions of banks' funding bases. CDs fell to 10.9% of total deposits across the industry from 12.9% in the first quarter and 13.9% in the fourth quarter.
Small banks remain the most reliant on CDs for funding but saw the contribution to their deposit bases decline in the second quarter. During that period, the median composition of CDs to total deposits was 25.9% at banks with less than $3 billion in assets, down notably from 28.8% in the prior quarter.
The median CD composition fell across all asset groups, with the biggest decline occurring at banks with $10 billion to $50 billion in assets, where the products fell to 12.8% of deposits from 16.3% in the prior quarter.
The institutions reporting the greatest decline in CDs had greater exposure to the products. Among the top 10 institutions with at least $3 billion in assets reporting the largest decrease in the CDs balances, six institutions disclosed in the second quarter that CDs still represented 30% or more of their deposit base.
Meanwhile, some institutions still reported increases in CD balances in the second quarter. Among the top 10 institutions with at least $3 billion in assets reporting the largest increases in CD balances, the products made up more than 40% of four institutions' deposit base.
