CUNA Mutual’s Chief Economist Steve Rick - What is Happening in the Savings Market?

MADISON, Wis.–A new analysis from CUNA Mutual’s chief economist is offering some insights into what is taking place in the savings market and driving consumer behavior.

Writing in CUNA Mutual’s newest Trends Report, Chief Economist Steve Rick noted the recent failure of Silicon Valley Bank was due to a liquidity crisis as depositors set off an old-fashioned bank run and withdrew their deposits. As a result, many small- and medium-sized regional banks have reported a loss of deposits, as some depositors have moved deposits to larger “too big to fail” banks.

“Credit unions are not immune to this trend,” wrote Rick. “During the first two months of 2023, credit union checking balances declined 2.4%, regular share balances fell 1.1% and money market deposit account balances fell 3.8%. But offsetting this decline has been a surge in certificates of deposits, which rose 12.5%. This shift in the mix of credit union deposits from low-cost to high-cost deposit accounts has tripled credit union cost of funds, from 0.35% in the first quarter  of 2022 to 1.1% in the first quarter of 2023.”

The Driver

So, what is driving the drop in money accounts (i.e., checking, savings, MMDAs) and the rise in investment accounts (i.e., certificates of deposit), asked Rick.

“The famous 20th-century economist John Maynard Keynes theorized that the demand for money was a function of interest rates, income, and the price level,” he explained. “He stated that a rise in market interest rates should reduce the demand for checking balances. The interest rate on CDs and Treasury bills represents the opportunity cost of holding checking balances that typically pay little to no interest.”

Rick pointed to the chart below, which shows the negative relationship between credit union checking account growth and the Fed Funds interest rate.

Shift Occurring

“Whenever the Federal Reserve raises the Fed Funds interest rate by more than three percentage points, credit union checking account growth slows significantly as funds shift to CDs or move to money market mutual funds,” Rick stated. “This happened in 1994-1995, 2005-2006, and again today in 2022-2023. This trend will only intensify as the Federal Reserve continues to raise interest rates.”