Banks will be watching their certificate of deposit accounts closely and monitoring changes in their deposit bases as interest rates rise, says financial analysis firm SNL Financial in a recent report.
SNL Financial found that CDs maturing in the next three months to a year account for about 12.3 percent of the liabilities for banks under $5 billion in assets. Meanwhile, CDs that will mature in one to three years account for another 7.6 percent of those banks' liabilities.
"If rates were higher when some of those CDs mature, banks may have to offer depositors higher rates to hold onto those funds," SNL Financial notes. If they don't offer better yields, consumers may walk that matured CD money over to another bank that will offer better yield.
The question for banks is how offering higher CD rates will cut into banks' interest margins, says banking consultant Bert Ely, principal of Ely & Co. in Alexandria, Virginia. He says banks will have to increase the yields being offered as interest rates rise, but that some of the assets on their books may not reprice as fast or mature as quickly as the CDs on the banks' books.
"In the short term, they could see margins get squeezed a little bit," Ely says. He says it's all a matter of how well different banks are preparing for interest rates to rise.
"When the tide goes up, not everyone is wearing their swim trunks," he says.
The SNL Financial report notes that many consumers are likely to walk their money from one bank to another if it means getting a better yield on their certificates of deposit.
"This could prove particularly true in a state like Florida, which has a high number of retirees that often shop for accounts with high rates," SNL Financial says.
It adds that "ultimately the rate environment will change and show who was ready for rising rates and who was not."
The bottom line: Banks are thinking ahead about what to do with CD yields when interest rates begin to rise, and that calculation could mean some competitive options for consumers shopping around.
Find the best rates on CDs right now with Bankrate's CD rates tables.
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