Time is Money in Deposit Pricing
Lack of timely information about changes in deposit rates can saddle a bank with a relatively higher cost of funds. The reason is that deposit re-pricing patterns are not uniform among institutions and across different pricing regions. By identifying the re-pricing patterns of your competitors, you can increase the timing and precision of your deposits pricing to avoid unnecessary interest expense.
Two patterns of deposit re-pricing are currently used in the industry: floating-week day and fixed-week day. Nationally, 61% of institutions re-price their deposits in a floating pattern, meaning, for example, that they change their rates on a Monday one week and on a Wednesday the following week. Since the day of the rate change is unpredictable, there may be a delay of up to one week in being able to follow a competitor’s re-pricing move.
For example, if your competitor dropped their rates on a Monday, but you didn’t find out until Friday, you may have overpaid for some deposits for a whole week. The fluctuation in pricing patterns from one week to the next can be substantial and can vary by as much as 100%.
The remaining 39% of institutions re-price their deposit products on the same day of the week every week. Nationally, Monday is the heaviest rate-change day for institutions that re-price on this fixed-day-of-the-week schedule, whereas Friday is the lightest. This means that with every passing day of the week, the relevance of your competitive pricing information diminishes to some degree.
For example, if you are using a competitive-pricing report that was produced on Monday for a Friday pricing meeting, you may be missing a substantial number of rate changes that occurred during the intervening days. Depending on the re-pricing day of your competitors, the decrease in relevancy can reach 71%.
If your vendor provides you with reports based on geographic rotation, i.e. East Coast on Monday, Southeast on Tuesday, your information likewise is less relevant with every passing day. The delayed reaction to rate changes of your competitors can saddle you with additional interest expense that could have been avoided with more timely information. For large deposit portfolios, especially long-term certificate of deposits, the additional cost of funds can be substantial.
What’s the solution? First, map out the re-pricing pattern of each of your competitors in each market and, second, survey all those competitors in each of your markets on the optimal day. This will ensure that your pricing decisions are based on the latest competitive information and that you are not over paying for deposits you can obtain at a lower interest expense.
Mr. Geller is the executive vice president of San Anselmo, Calif.-based Market Rates Insight, which provides competitive research and analytics to financial institutions. He can be reached at [email protected].