Is Your Certificate Promotion Doing What You Want?
September 19, 2018
As liquidity and cost of funds pressures continue to be a focus, credit unions are exploring possible funding options within the liquidity toolbox. Among them, certificate promotions which, in this rate environment, are becoming a more frequently used tool.
On the surface, attracting liquidity through certificates seems straightforward. Offer a competitive rate, promote it, and the dollars typically come in with ease. However, before rolling out that next certificate promotion, there are several important items to consider to make it as effective as possible.
For example, has the credit union run a what-if and do the right decision-makers understand the impact of the certificate promotion potentially cannibalizing existing low-cost deposits? This challenge has been addressed in previous blogs, specifically the one titled Hidden Cost of Addressing Liquidity Needs.
In the table above, the credit union achieved its target of attracting $20M of new funds. However, because half the funds transferred from regular shares, the cost of $20M in promo certificate balances is 3.40% versus the promo rate of 1.75%.
Just because cannibalization can occur, increasing the marginal cost of new funding does not mean certificates are a bad option for liquidity. Rather, it is an important reminder that credit unions may need to consider stiffer penalties for members who take advantage of the promo rate. If the credit union’s objective is to lock in funds for liquidity purposes and help mitigate interest rate risk, a traditional 3- or 6-month penalty might not be enough to address both objectives. For more on withdrawal penalties and determining when a member may decide to early withdraw, refer to our Napkin Math video, Breakeven Point for Early Withdrawing Member CDs.
Speaking of mitigating interest rate risk, credit unions need to balance protection from rising market interest rates with the possibility of rates going back down. Giving away too much in the certificate promo rate can create pressure to earnings should rates decrease. This is another important reason to run a what-if and understand the impact in both up and down rate environments.
Member certificates can be an effective liquidity tool while also providing a nice giveback to the membership. Taking a strategic approach on early withdrawal penalties, measuring the potential cannibalization of existing deposits, while not losing sight of down rate environments, will help credit unions strike a better balance with promotional certificate trade-offs.
