Rates on certificates of deposits at U.S. banks have dropped notably in 2020, but the pace of decreases has slowed in recent months.
As interest rates plunged to historical lows in early spring, banks worked to cut deposit costs quickly to mitigate pressure on net interest margins as earning-asset yields moved lower. Those efforts have been aided by strong deposit growth, largely pushing any liquidity concerns to the sidelines. Further declines in the rates on CDs, which often carry the highest rate of any deposit product, could be hard to come by as the average has fallen to levels last seen in the late spring of 2017 when the Fed's tightening cycle was just underway.
CD rates dropped notably in the first quarter, particularly in the last few weeks of the period, as the Federal Reserve pushed the benchmark fed funds rate to the zero bound. Rates on those products fell at a slower pace in the second quarter even as Fed data show that deposits at commercial banks rose 18.2% between Jan. 1 and June 17, according to the latest H.8 release.
Through June 19, the average rate on one-year CDs, one of the most popular products, has declined 49 basis points since Jan. 3. However, 67% of the decline, or 33 basis points of the decrease, occurred between Jan. 3 and March 27 during the first quarter.
Much of the decline in CD rates came in the month after the Fed's emergency rate cuts late in the first quarter. Between Feb. 28, the Friday before the Fed's first emergency cut, and March 27, the average rate on one-year CDs fell 25 basis points across the industry. That means more than half of the decline in average CD rates this year came in a month's time.
Banks with assets between $50 billion and $250 billion have decreased rates the most on one-year CDs this year, lowering the average rate by 52 basis points. Institutions in that asset group still offer the highest rate on the product, though, at 39 basis points.
Rates on longer-dated time deposits have decreased the most thus far, given that those products tend to more closely mirror long-term benchmark interest rates like 5-year and 10-year Treasury notes. The yields on both of those instruments have plunged in 2020, falling more than 130 basis points and 110 basis points, respectively. Rates on three-year CDs have fallen 57 basis points but likely will fall further in the coming quarters given that half of the decline in long-term rates has occurred in the second quarter alone.
Banks will have the opportunity to reprice some of their CD portfolios in the coming quarters. At the end of the first quarter, nearly 70% of retail CDs were set to reprice or mature in the next 12 months.
Still, as the rates on new CDs fell in late 2019, the products became smaller portions of banks' funding bases. CDs fell to 12.9% of total deposits across the industry from 13.9% in the fourth quarter and 14.4% in the third quarter.
Small banks remain the most reliant on CDs for funding but saw the contribution to their deposit bases decline in the first quarter. During that period, the median composition of CDs to total deposits was 28.8% at banks with less than $3 billion in assets, down from 29.5% a year ago.
The median CD composition fell across all asset groups, with the biggest decline occurring at banks with $3 billion to $10 billion, where the products fell to 19.1% of deposits from 22.2% a year earlier.
However, when focusing on individual institutions across the industry that reported the greatest increases in exposure to CDs, most were community banks. Among the top 20 institutions with at least $3 billion in assets reporting the largest increase in CD reliance for funding, 13 had assets of less than $10 billion and six had assets of less than $5 billion.
The industry, meanwhile, has relied more on Federal Home Loan Bank borrowings even in the face of strong deposit growth and declining deposit costs, growing advances by 17.6% from year-ago levels.
