By Andrew Gelsomini, Catalyst Strategic Solutions Senior ALM Consultant
Historically, belief has been that surge deposits – during economically challenging periods such as this – were temporary and expected to dissipate once the economy
returned to an upward trend.
Intuitively, this migration makes sense. Behaviorally, however, the opposite proved to be true during the Great Recession of 2008. The expected part, a surge in deposits, did occur. Much like today, financial institutions across the nation were flooded with excess deposits almost overnight. It wasn’t until the economy started to rebound, that we saw surge deposit behavior veer from the historical “norm” – leaving cash on balance sheets much longer than expected.
What caused the surplus of funds to linger?
Although there is no “one-size-fits-all” answer, finding the right approach involves a combination of two important considerations. The first is tied to the fundamental principle upon which all credit unions are built – serving member needs. With that in mind, take a look at your membership and get creative. See what types of products or services you can develop to best serve them during this time of hardship. Don’t be afraid to survey members for further insight into their needs.
Secondly, this rate environment typically leads to tighter spreads. Leveraging such member insight, along with the opportunities at hand, may help credit unions find new ways of driving income beyond the short term.
For example, evaluating interest-only loans on appreciable assets, such as real estate, may be beneficial to your membership. While you are still collecting interest earnings on the loan, principal payment is not necessary (at this time) due to the surge deposits, and any recovery concerns are reduced by the appreciable nature of residential real estate. Additionally, this affords members the opportunity to stay current on loan payments, and in theory, avoid any kind of delinquency or default altogether.
Ultimately, this is just one of the many ways credit unions can address excess deposit levels and may not serve as a direct fit for your needs. However, having this type of conversation and evaluating how to make the most of the current deposit/rate environments – both for members and your bottom line – is a healthy way to move forward.
Catalyst Strategic Solutions’ Team of ALM Consultants has the knowledge, experience and insight to help credit unions weather the unprecedented times. Want to know how you can best position your balance sheet against surge deposits? Contact us today.