Competitor Deposit Rates Don’t Matter: The Two Most Important Factors for Effective CD Pricing Strategy
- Jeff Croteau
- 19 hours ago
- 5 min read
There is a common thread at almost every ALCO or pricing committee meeting that DCG joins. The CD pricing strategy discussion inevitably (and quickly) turns to what the competition is doing.
Also inevitably, conversation screeches to a halt in surprise when we suggest that there’s a more productive way to strategize. Because while competitive pricing is a factor, it is far from the most important consideration when formalizing a CD pricing strategy.
Let’s dissect why competitive pricing may be an “irrational” variable.
First, competitors could have higher asset yields and margins than peers, allowing them to price their CDs above treasury rates or local norms and maintain a strong balance sheet spread. Second, they may have a tight liquidity position and need to pay up on deposits to pay down borrowings. Or alleviate regulatory challenges. Third, they may be looking at your deposit rates and wondering, “When are they going to lower CD rates so we can lower ours?!”
There’s a smarter way to strategize on CD pricing, and it starts with looking inward. Two of the most important factors to analyze are 1) your liquidity position and 2) what the data says about your CD base.
Factor # 1: Liquidity
How you view, measure, and manage liquidity has a major ripple effect on deposit pricing and management. In reviewing hundreds of liquidity policies, DCG has observed financial institutions managing liquidity in widely varying ways. For example:
Wholesale Funding. Institutions may have very different levels of willingness to use wholesale funding. Some have never borrowed from the FHLB. Many have, but at different levels: some are comfortable if, say, 5% of their liabilities are FHLB borrowings; others have no issues at 20% or even greater.
Liquidity measurement. Institutions may have different definitions as to what “liquidity” even comprises. For example, some may view pledged assets as a viable liquidity source and others may not. Some may be comfortable with 5% or less in cash; others can’t sleep at night below 10%. For some, a loan/deposit ratio of 90-100% is a cause for alarm; for others, a ratio above 100% is business as usual. Some may focus more on a cash/assets ratio, and others on liquid assets. How the institution views, measures, and manages liquidity may also change its assessments as to how much liquidity it actually has.
Consider the following hypothetical case study:
Institution A is tight on cash and is bumping up against its wholesale funding policy limit of 25% with a total borrowing to asset ratio of 22%. In a recent exam, regulators suggested they need to prioritize paying down wholesale funds. Institution A doesn’t have the same liberties to aggressively lower CD rates as Institution B, which has the same 25% policy and no outstanding borrowings.
Institution B may look at a simple marginal cost of funds analysis, such as the example below, and decide that it makes financial sense to continue lowering CD rates by another 10 or 20bps from today’s levels. Even if they see an additional 10 or 15% of attrition, they’ll be able to replace more cheaply through the wholesale markets. It would be remiss of Institution B to match Institution A’s CD pricing simply because they are a local competitor offering a higher rate.
Marginal Cost of Funds: Short Term CD Special Current Rate 3.50%
Source: Darling Consulting Group funding cost calculator, hypothetical example
The pivotal question becomes: What is your need for liquidity over the next six to twelve months? If your institution’s 2026 budget calls for 2% loan growth, that would likely allow for a more defensive CD pricing strategy than 10% loan growth.
With that said, if you plan or desire to grow deposits significantly this year, are CDs the best vehicle to do so?
The Deposits360°® industry data below illustrates that CD balances have been relatively flat over the last 12 months and they are projected to slightly contract over the next 12 months. As the Fed funds rate has already come down 175bps since its post-pandemic peak and could come down further in 2026, now may be an opportune time to consider other strategies to drive deposit growth.
Source: Darling Consulting Group Deposits360°®
Factor # 2 CD Analytics
Your data has a story to tell that may guide more effective strategy. Consider these current data points pulled from over 300 Deposits360° clients:
CD rollover trends in Q4 are over 90%
New money coming into CDs is at the lowest level of the cycle
MMDAs are outperforming CDs in terms of cost of growth
There are myriad data points that may be meaningful to explore for CD pricing strategy. We’ll highlight one in the following example: the weighted average rate of upcoming CD maturities.
Let’s walk through recent data from two actual DCG clients with identical CD pricing (names masked for privacy).
Source: Darling Consulting Group Deposits360°® client data
One could easily conclude that these two institutions should not pursue the same pricing strategy.
Institution West could have made a case that they would have been better served by lagging CD rate cuts (or perhaps switching strategies to lead with an attractive MMDA product to entice mix change). If they were at 4.00% (well above Q4 2025 short term treasury rates) vs. 3.50% they could have still realized material CD cost relief while having a better chance of maintaining some of those balances. Given that their upcoming CD maturities in 2026 average 4.26%, Institution West could justify increasing their current CD rate (of course, considering other factors such as liquidity and margin).
It would be unfortunate if Institution East, with a significantly different CD profile, were to follow suit and unnecessarily increase interest expense simply because a competitor is offering higher rates.
Next steps for CD pricing strategy conversations
Competition does matter, but not nearly to the extent it is talked about in pricing meetings. Other factors, such as liquidity, earnings, and current CD makeup, should take priority over competitive rates when it comes to your CD strategy.
Start the conversation with liquidity position, liquidity needs, the cost of obtaining liquidity, and then competition can enter the conversation.
For more information about analyzing deposit data for more effective pricing strategy or to schedule a complimentary deposit pricing review, contact DCG.
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Jeff Croteau is a Director at Darling Consulting Group, where he assists financial institution executives in strengthening their asset liability management (ALM) process. In this role, he provides custom solutions for managing interest rate risk, liquidity risk, and capital. Jeff is a frequent speaker and is knowledgeable in the areas of deposit strategies, liquidity management, and executive-level education.
Jeff began his career at DCG in 2013 as a financial analyst. He holds a B.S. in accounting from Bentley University.
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