The Risk from Paying Lower Deposit Rates than Banks

By Ray Birch12.02.2019

A new report indicates credit unions are not paying as much for deposits as banks, and that could hurt many CUs as interest rates shift.

“In the last week the rate paid on interest checking among all financial institutions declined—the first rate change to interest checking in nearly 14 months,” said Michael Moebs, economist and CEO at Moebs $ervices. “The last rate change for interest checking was an increase in September 2018, while other rates have been changing almost weekly.”

This past week, along with interest checking, rates also decreased for retail money market deposit accounts and six separate terms of retail CDs, the Moebs report shows.

Even more significant, total interest expense divided by assets at credit unions fell below that of banks for the first time since 2007.

“This means credit unions are not paying as much for deposits as banks,” said Moebs, noting the findings are based on credit unions under $1 billion in assets. “Interest expense is divided by assets to show a uniform standard for comparison. This shift, credit unions paying less, is significant and does not bode well for many CUs. This implies CU growth may be curtailed.”

So far in 2019 total interest expense is 88 basis points at all depositories. Banks are 90 BPs while CUs are 83 BPs, or 7.8% less overall on deposits, explained Moebs.

Interest Expense

A “Meaningful” Concern

The concern for CUs, according to Moebs, is those CUs with assets below $1 billion tend to have high non-interest expenses, which is taking away their ability to pay more on deposits and attract more money to fund lending, which increases capital and allows CUs to grow.

“This is a meaningful finding and might become a problem for those CUs under $1 billion,” stated Moebs.

Deposit rates have been erratic in 2019. There were eight rate decreases for eight different deposit types in the past 10 days, something that also happened at the end of May this year, noted Moebs.

“There hasn’t been this many rate changes in deposits since 2011 when rates were falling due to the mortgage meltdown of 2008,” he said. “The $13.2 trillion deposit market is basically ignored by the Fed this past week, which left the federal funds rate unchanged. This is significant because the deposit market is not part of the Fed’s rate decisions when pricing.”

Asset Size Differences

As Moebs stated, the issue is different for CUs above $1 billion in assets, particularly those above $10 billion.

The Moebs study shows CUs above $10 billion in assets are paying 116 BPs, while banks are paying 91 BPs.

“Stated differently, larger banks are paying 21% less than larger CUs. Contrasting is community banks who are paying 66 BPs, while CUs of the same size are paying only 43 BPs, or 35% less than the banks,” explained Moebs. “What the numbers show is the interest paying, deposit market is as active as the stock and bond markets, and the smaller depositories are falling short on rates.”

Reprinted with permission from, a leading source of news and resources for credit union decision-makers.