CDs concentration at US banks rise above pre-pandemic levels in Q3

The US banking industry's exposure to certificates of deposits (CDs) rose to pre-pandemic levels, even as the growth of the product slows.

In aggregate, CD balances at US banks jumped to $2.685 trillion as of Sept. 30, 2023, up 10.1% from the previous quarter. The balances were up 24.8% and 14.4% during the first and second quarter of the year, respectively.

The industry's total deposits declined for the sixth consecutive quarter as customers continue moving their deposits into the higher interest-paying accounts. The massive influx of cheap deposits as a response to COVID-19 pandemic pushed the concentration of noninterest-bearing deposits to as high as 28.9% in 2021. The ratio has since dropped consistently as the Fed began raising interest rates in 2022. At the end of the third quarter of 2023, it had fallen to 22.6%, the same as at the end of 2019 with roughly $4 trillion more in total deposits now.

As of Sept. 30, 2023, CDs represented 14.5% of the industry's total deposits, up from 13.1% at the end of the second quarter. The CDs concentration is up from the low of 6.3% at the end of the first quarter of 2022 to above pre-pandemic concentration of 14.0% at the end of 2019.

Banks seek relatively cheaper funding options

As the deposit outflows subside, banks continue to pay down more expensive borrowings, such as Federal Home Loan Bank (FHLB) advances, and utilize relatively less expensive funding sources like brokered deposits to build liquidity profiles. FHLB advances were down 8.5% quarter over quarter to $602.64 billion as of Sept. 30, 2023. These borrowings had risen above $800 billion at the end of the first quarter of 2023 as banks tapped emergency funding to protect against deposit outflows following the collapse of Silicon Valley Bank and Signature Bank in March.

Defending core deposits

As the deposit competition heats up, many banks are offering higher rates on deposit products such as CDs to retain core deposits. As of Dec. 15, 2023, 749 banks offered rates over 4% on one-year $10,000 CDs, up from 685 at Oct. 6, 2023, according to S&P Global Market Intelligence data. Only 98 banks had marketed rates over 4% on the product 12 months ago.

The average rate on a one-year $10,000 CD for the industry was 2.23% at Dec. 15, 2023, up 20 basis points from July, 28, 2023.

Deposit mix shift trend continues

Large time deposits at domestically chartered US banks are up 37.4% between Sept. 27, and Dec. 20, 2023, according to seasonally adjusted data in the Federal Reserve's H.8 report on bank assets and liabilities. The 25 largest banks posted an increase of 13.1%, while the small banks logged 6.3% growth. Total deposits increased 0.1% during the same period.