Credit unions must rethink deposit pricing strategies
Traditional 'cost-of-funds' pricing model doesn't cut it anymore. Today's interest rate picture dictates more reliance on broader 'cost-of-deposits' pricing philosophy. Here's how to shift into this new thinking to build greater profitability.
The Federal Reserve raised rates four times last year, making it nine total adjustments over the past three years, when the Fed first began raising rates from near zero. Despite favorable economic indicators and a strengthening economy, these rising rates, coupled with ultra-competitive loan markets, created more margin compression for community banks and credit unions. That was 2018.
This year, while the Fed says it plans to slow down rate hikes, there still remains uncertainty on the rate environment over the next 12 months. Regardless of the environment, community financial institutions still need to evaluate core deposits to determine how best to spur growth and profitability. With a highly flexible strategy, banks and credit unions can battle margin compression despite ongoing economic volatility.
Dangers of Driving Solely by ‘Cost of Funds’ Thinking
Anyone who went to banking school likely learned the acronym “COF” on their very first day — and for good reason. Without a sharp eye on cost of funds (COF), banks and credit unions can expose themselves to interest rate risk (among many other pitfalls), with detrimental long-term effects likely.
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