Is the Rise in Share Certificates a Blessing in Disguise?

For many credit unions share inflows over the past 18-24 months have come from the increased member demand for share certificates...


For many credit unions share inflows over the past 18-24 months have come from the increased member demand for share certificates. In fact, of the $43 billion in share growth over the past 12 months $34 billion has come from share certificates. 

It makes sense that consumers are looking for higher yielding insured deposits with many institutions, including banks and credit unions, paying very low rates on short-term deposits. The certificate’s importance to the credit unions funding has been on the rise since mid-2004 when they accounted for 22% of total shares. As of June 2007 that number has risen to over 33%. During the same period credit unions with over $50 million in assets added $80 billion of share certificates to their books. Today, certificates make up the largest component of most credit union shares.

Share Certificates as a % of Total Shares

Traditionally, certificate growth has been seen as a positive. Certificates provide the long term funding many credit unions match their loans again in an asset liability management context. It is also important to recognize that certificate growth increased around the same time the Federal Reserve started raising interest rates. Conversely, the chart above shows certificates saw less growth while rates fell during 2000-2003. 

It is hard to determine how much of the money which came into credit unions during 2000-2003 as short-term deposits went into share certificates. In other words, how much did credit unions cannibalize their own shares? The importance of this is two fold.  First, cannibalization can drastically increase the marginal cost of funds. A high marginal cost of funds can make share certificates extremely expensive. Second, if many CFO’s are using certificates as an ALM tool, what happens if rates fall as expected? Will consumers still be looking to place funds in term deposits accounts? Also, will credit unions be able to continue to pay such high rates for certificates? A good problem that could arise from credit unions keeping their rates high is potentially attracting more money. If credit unions do attract more money it could become a challenge put that money to work, as investment yields are down, auto loan growth is slow, and the housing market in some areas is weak.