As rates decline, deposit costs must decline also, right? Think again.
The forecast that declining rates = declining deposit cost may be oversimplistic. In fact, declining rates will likely breed greater funding competition for deposits, consumer credit, and just about everything else.
Many banking executives might believe that near-zero interest rates are normal. They also might believe a return to near-zero rates would mean a return to large deposit volumes at low costs.
Unfortunately, while history often repeats itself, it sometimes doesn’t. In the case of rates, a decline to near zero—or even a rate decline of two hundred basis points—will likely sustain competitive pressure on deposits rather than diminish it.
Why would deposit pressure continue if rates declined?
It’s banks’ loan-to-deposit ratios, which are down significantly. Banking institutions have the capacity to lend right now. And, large numbers of consumers and businesses have the capacity to borrow. Ask anyone at a bank or credit union; they know a business, a friend, or a family member waiting on lower rates to finance something: Business expansion, a new kitchen, or a new home.
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