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Deposit rates still low

Recent reports have found that deposit rates have been significantly low and refusing to adapt to the decline in interest rates. According to BAI Banking Strategies, deposit balances declined in response to lower interest rates for the second consecutive quarter over the past six years. Second quarter balances declined $31 billion and $20 billion was declined in the first quarter of this year. The possible change in deposit rates means financial institutions have to invest in money counters and check processing solutions to ensure all amounts of cash and checks taken in are processed quickly and efficiently. The low deposit rates are surprising, but experts at BAI say this is a sign that rates are in a "perfect storm," and interest rates on deposits are expected to increase rather soon.

In order to maintain deposit balances, interest rates will need to rise. Higher rates will also be necessary to increase liquidity ratios and comply with financial institution regulations. Both time deposits and liquid accounts saw a decrease in the second quarter of this year. However, it is predicted that current deposit rates will see a change in the near future as BAI calls this time a "turning point." If the Federal Reserve increases federal funds rates and other contributing factors fall into place as they should, deposit rates are expected to rise in the middle of 2014. The next few months should see a gradual increase in rates, though start rising at a steeper rate mid-2014.

This "perfect storm" will cause this gradual increase for the next few months, though financial institutions should be aware of how this will affect their services and business and public members. Banks and credit unions will need to ensure their money counters and check processing technology is up to date and ensure employees are prepared to educate individual members on the reportedly increasing deposit rates. Certain factors may also push interest rates higher and customers will want to be aware of how their accounts will be affected.

October 11, 2013