Tracking Trends in Deposit Pricing

Tracking trends in deposit pricing involves three fundamental principles, each of which provides an additional perspective for the analysis:

Distinguishing between an event and a trend. A pricing event is a single occurrence of rate changes that may not repeat itself for a long period of time. Such an event may occur as a reaction to temporary need for liquidity or in response to competitive pressure. A trend, on the other hand, is a succession of increases over time designed to achieve a strategic goal in response to economic conditions.

Conventional deposit tracking reports are designed to show pricing events, focusing on rate changes (if any) that occurred during the previous week. However, if rates are rising in intervals of every four weeks, a conventional report will show only 25% (one out of four weeks) of the trend. On the other hand, a trend tracker report shows cumulative changes in rates regardless of time intervals, thus highlighting a trend in pricing rather than just a single event.

Enlarging the field of vision. Conventional deposit reports track a defined set of competitors, typically 10 to 15. That’s important but it is limited in scope because a pricing trend may start outside the “field of vision” of a handful of competitors.

The use of a trend tracker tool expands the field of vision without the need to increase the number of tracked competitors on a regular basis. The ability to select any deposit product at any institution provides a wide view of pricing changes, thus allowing detection of trends. For example, this trend tracker analysis shows CD rates in the Illinois pricing region. In the second quarter of 2014, the number of flat (unchanged) CD rates dropped 12.2%. This variance reflects a 6.7% increase in the number of CD products exhibiting rising rates and 5.5% increase in CDs with falling rates in the second quarter compared to the first quarter.

Monitoring and analyzing. Trend tracking is an ongoing task. It’s also important to establish regular monitoring in order to detect looming trends in deposit pricing. A best practice is to establish a rotation schedule for trend tracking, for example, a weekly monitoring of a particular product, such as money market accounts, across the entire market in conjunction with the weekly monitoring of the competitive set. The information obtained in the trend tracker report should then be analyzed.

Financial health is no different than personal health in that early detection of anomalies is paramount. Otherwise, you run the risk of incurring a higher cost of funds and liquidity shortfall – not to mention, getting caught by surprise.

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].