A Different Way To Price Deposits

LAKE FOREST, Ill.—Are credit unions using money supply to determine deposit pricing?

One economist suggests using money supply in an adjusted manner is a useful pricing tool.

Michael Moebs, economist and chair of Moebs $ervices, explained why.

“Money supply is best measured by discarding currency and foreign funds. Focus only on domestic deposits,” said Moebs. “Adjusting money supply, showing only the deposit essentials, helps identify strategic and tactical actions depositories can make. Use money stock as defined (see table below) and offer high rates. The market demands higher deposit interest rates.”

Moebs said using money supply is simply a different—more effective—way to price deposits in a period in which liquidity dollars are in high demand.

Different Thinking

“This is not something financial institutions typically think about doing,” said Moebs. “Think of it this way. It is now apple season in the nation. You are a family of four that each wants apples to eat. Are apples sold individually, priced by apple, or by the pound? Right now, FIs sell deposits by individual prices. They do not sell by balances. Should deposits less than $100,000 get paid less than those up to $250,000? And what about the rate for over $250,000?”

The price of a deposit should be by both account type and by balance, Moebs said.

For example, Moebs said a $100 interest checking deposit could be priced at o.25%. A $1,000 savings deposit at 0.50%, a $100,000 CD could be priced at 1.00%, and a $200,000 money market deposit account could be 2%.

Michael Moebs

“Knowing how money supply maps out by individual  deposit service balances is equally as important as determining deposit rate,” noted Moebs. “Think of this as either tiering by price and/or balance within one service, or tiering with price and/or balance with multiple individual services. Either approach can work, yet tiering with multiple services increases cross-sales, therefore making it harder for the consumer to leave and take money to a competitor.”

Money Stock And Economy

Money stock mirrors population and economic growth, noted Moebs.

“Since the creation of the Fed in 1914, money stock has grown an average of 7% yearly. Interestingly, this computes after 110 years to $25 trillion,” said Moebs. “In just five years since 2019, money stock growth is 45%, driven from major events: COVID, stimulus funds, fed balance sheet actions, and now a major election.”

M1 is interest and non-interest checking plus savings. M2 is mainly term deposits or retail and commercial CDs. M3 is mainly Wall Street funds—both retail or investor oriented and commercial or business dollars.

“The searching saver era has begun,” said Moebs. “This means the menu for savers is now: deposits, Treasuries, or money market mutual funds invested in Treasuries. COVID brought about these changes and depositories need to comply now.”

Moebs outlined how to use money supply to price for specific deposit types.

Transaction Accounts

“Savers are riskless but shrewd in deposit rates. Savers moved money during COVID to get better rates on their funds to U.S. Treasury securities. With the full rescue of Silicon Valley Bank, savers got better rates on Treasuries,” said Moebs, who added that total savings levels have declined 2.9% from pre-COVID balances.

“To keep savings account balances, depositories must change pricing and offer higher rates or lose these funds,” said Moebs. “Checking moved considerably higher as consumers want liquidity with their short-term money and also higher rates with more money in interest checking.”

Insured Savings Accounts

“A mainstay since introduced in 1962, IRAs and Keogh accounts ccounts declined for the first time ever as savers searched for higher rates and got it with money market mutual funds (MMMFs) and Treasuries. To win these funds back, depositories must pay more aggressive rates,” said Moebs.

“Retail CDs, like the elephant, were nearly extinct, falling to only $50 billion in 2022. The elephant came back with protected reserves and retail CDs came back with high deposit interest rates. Jumbo CDs, the lifeblood of small business, increased 33.1% from pre-COVID balances due to higher rates.”

Uninsured Deposits

“These funds represent Wall Street. With heavy use of Treasuries in MMMFs, these mutual funds have taken IRA and Keogh funds from depositories and have curbed the growth of bank, credit union, and thrift deposits,” Moebs said. “Yet, MMMFs have only grown 1.8%. Contrast this with CD depository growth of 2.5%. FIs have proven with reasonable market rates consumers and small businesses will stay with depositories. If FIs stay within at least 50 basis points of MMMFs they will win.”