Even as the Federal Reserve has hiked short-term rates at the fastest pace in 30 years, the rates that banks offer on their certificates of deposits have increased at a slower pace than witnessed during the last tightening cycle.
Historically, CD rates have closely mirrored long-term benchmark rates such as the 5-year and 10-year Treasury yields. But even as those long-term rates have climbed more than 100 basis points since the end of the first quarter, the rates banks offer on one-year CDs — one of the most popular term funding products — have not risen that much as institutions continue to report historically low loan-to-deposit ratios.
CD rates rise the fastest at large banks
Across the industry, the average rate on one-year CDs has risen 36 basis points to 0.62% between Sept. 17, 2021, and Sept. 16, 2022. Large banks, institutions with more than $250 billion in assets, have increased their offers on one-year CDs the most, lifting those rates by 77 basis points since September 2021.
With the fed funds rate rising 225 basis points during that time frame, that still equates to a beta, or what percentage of change in rates banks pass on to customers, of 34.1% for the largest banks.
Meanwhile, the industry recorded a beta of just 16% during that time frame, a stark contrast to 2018 when the industry recorded a beta of 56.7% on retail CDs when the fed funds rate increased by 76 basis points.
Large banks growing CDs
Banks, particularly the nation's largest institutions, grew time deposits in the second quarter. Banks large and small took advantage of the flood of liquidity into the system by shrinking their CD balances nearly 39% between year-end 2019 and the first quarter of 2022, but those balances grew in the second quarter and climbed to 6.8% of total deposits.
Institutions with more than $250 billion in assets grew CDs the most, building the balances 12.8% from the prior period.
The Federal Reserve's H.8, which tracks commercial bank balance sheets on a weekly basis, shows that the 25 largest, domestically chartered banks in the U.S. reported 5.3% growth in large time deposits through the week ended Sept. 7 when compared to March 30, the day before the first quarter ended.
Growing CD balances today may be seen as attractive because institutions can lock in funding before deposit costs rise much more materially. The Fed continues to raise rates at a swift pace while shrinking its balance sheet, which should add to the liquidity pressures that began to surface in the second quarter when deposits declined from the prior period.
While banks should still be able to report higher interest margins even as deposit costs rise more quickly, some institutions might see CDs as a more attractive funding vehicle to protect deposits and lock in rates at current prices, particularly if they are fearful that liquidity pressures could accelerate with further tightening of monetary policy.
