So why do we keep hearing about “surge” deposits and how important it is to know if you’re holding any? Well, it might be because in the past 10 years, CD balances in FDIC insured institutions have fallen by $880 Billion; yes, that’s Billion with a capital “B.” And while that may be the bad news, the good news is that over the same time period, non-maturity deposits (DDAs, NOWs, Savings, and MMDAs) have grown by $5.9 Trillion (with a capital “T”).
What does all this mean? It means that if your CDs are declining, and/or your non-maturity deposit balances are growing, you are not alone. It also means that some of the growth will likely be labeled “surge” deposits, and while they can be a great low-cost funding source, these “surge” deposits will also likely be a key discussion point at your next Regulatory exam. Their concern is that if CD rates increase more than rates on other deposits, you’ll see money move from lower costing MMDAs, Savings, and NOWs, back into more costly CDs, which will of course mean a hit to earnings.
FDIC guidance states that as part of formulating decay rate assumptions, “banks should consider adjustments for qualitative factors to reflect current-period market conditions and anticipated customer behavior in response to interest rate fluctuations, for example by adjusting [for] the assumed runoff of surge deposits.” They further note that “CD balances that have migrated to savings or other non-maturity account types in recent years should be included in considering surge deposit fluctuations.” OCC guidance adds “as market interest rates rise or other investment opportunities, such as mutual funds, become more attractive, this accumulation is likely to erode as deposits shift into other products or leave the bank.”
So, like it or not, you need to have a handle on the level of “surge” deposits at your institution and ensure that you’re accounting for them in your IRR modeling.
If you haven’t yet reviewed your deposit base and quantified the level of potential “surge” deposits, we can do it for you (and it's not expensive). You'll get complete documentation, then be shown how to use the results to adjust your decay assumptions and cash flow modeling scenarios.
If you'd like to learn more about surge deposits, click here to watch a quick video.