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Deposit Growth in a Changing Interest Rate Environment

This report attempts to gain a better understanding of the movement in interest rates by looking at the liability side of the credit union balance sheet: influences on deposit growth.

Executive Summary

Credit unions, like most financial intermediaries, are a nexus of taking of deposits and making of loans. Understanding the influences and future movements of deposits and loans is essential to running a safe, sound, and successful credit union. In this study, the researchers focus on one of the most important issues facing a credit union on the liability side of its balance sheet: influences on deposit growth. They provide insight into this area by examining how interest rates affect both the growth and the composition of credit unions’ liabilities over a 12-year time frame.

What is the research about?

Swidler and Hinkelmann explain how interest rates affected both the growth and the composition of credit union liabilities over a 12-year time frame. The research team finds that market interest rates have little effect on total credit union deposits. For example, as market interest rates decrease, members shift to regular share and money market deposits, and as regular share, money market, and share certificate rates increase, the shift is toward share certificates. Although these patterns are present for credit unions as a whole, the researchers find significant differences between large and small credit unions in member responses to interest rate changes.

What are the credit union implications?

Going beyond the theoretical nature of this study, Swidler and Hinkelmann model future movements of individual credit unions’ deposit growth as an additional way to understand the relationship between interest rate changes and a particular credit union’s deposits. They discover that deposit accounts for each credit union display idiosyncratic responses to interest rate changes, which generally corresponds with their findings from the aggregate industry data. In short, this study provides a framework for credit unions to forecast the dynamic behavior of their deposit accounts in an environment of changing interest rates.