Certificates of deposits (CDs) have experienced a dramatic change in consumer demand, interest rate levels and type offered in the last five years. And it’s unlikely that the CD market will return to a more “traditional” state until the economy itself returns to a more “normalized” state.
Let’s look first at consumer demand. Balances of all CDs dropped by about $700 billion in the last five years and their proportion of total deposits fell to 18% in December 2011, from 31% in January 2007. The financial crisis of 2008-2009 and its lingering aftershocks clearly impacted both consumer preference and the financial institutions, which attempted to retain CD balances by changing the mix of products offered to customers.
This changing mix is related to the need to offer lower interest rates. An analysis of the changes in CDs’ rates and types over the last five years shows that the largest drop in annual percentage yield (APY) occurred in the average Indexed CD, which lost 377 basis points – from an APY of 5.02% in January of 2007 to an APY of 1.25% in February of 2012. The smallest drop in APY occurred in Add-to CDs, which lost 220 basis points, from an average APY of 4.34% to 2.14% during the same period.
From a relative-change perspective, the greatest loss in return value of CD types occurred in the average APY of the Step Ladder CD, which lost 75.9%. The smallest drop in relative return value occurred in Add-to CDs, which lost “only” 50.6% during the last five years.
The greatest gain in volume occurred with the Relationship CD, which requires customers to open an additional account with the bank. These CDs increased by 7.8% in the last five years. On the other side of the spectrum is the Regular CD type, which dropped by as much as 9.9% during the period. However, an analysis of the current mix of CD types shows that the Regular CD is still the most common, constituting 67.3% of the total, followed by Relationship CDs at 25.4%. The other types of CDs, such as Bump, Callable, Step Ladder, New Money, Indexed, Add-to and Withdrawal-no-Penalty make up the remaining 7.3% of CDs offered to consumers.
These findings suggest that institutions began promoting more Relationship CDs in order to both offer a slightly higher interest rate than consumers could receive on other types, as well as to establish deeper relationships with customers by requiring an additional account opening to qualify for the higher CD rate.
Will CDs in general return to their pre-2008 popularity? Most probably yes, but not until consumers feel that the economy is in a sustained recovery, interest rates resume climbing and the marginal rate between term and liquid accounts is restored to a level that makes it worthwhile for consumers to lock in their money in return for higher returns.
Mr. Geller is the executive vice president of San Anselmo, Calif.-based Market Rates Insight, where he oversees the research and analytics services of the company. He can be reached at [email protected].
