Many executives dwelled this earnings season on how much high unemployment will hurt their credit outlooks, but the other side of the balance sheet presents a fuller, perhaps more optimistic picture.

Deposit rates may not start rising again until the unemployment rate starts to decline, according to a new study — and that probably won't happen until the latter part of 2010.

If that's the case, experts say, the prolonged low-rate environment will benefit banks, provided consumers continue to park their money there.

When the unemployment rate is high and economic activity low, the need for deposits to fund loans is less acute, said Dan Geller, an executive vice president at Market Rates Insight, a San Anselmo, Calif., firm that tracks deposit pricing. That means banks can pay "the minimal amount they can get by with on deposits."

The Market Rates Insight study found that nearly 80% of the movement in the national average rate on deposits is attributable to the movement in the unemployment rate. For every 1-percentage-point rise in the unemployment rate, deposit rates drop an average of 49 basis points, according to the firm's analysis of five years of data. For example, in March 2007 the unemployment rate stood at 4.2%, with the average deposit rate at 4.25%. In September 2009 the unemployment rate had risen to 9.8%, but the average deposit rate declined to 1.55%.

Geller contends that deposit rates may not rise appreciably again until the unemployment rate, currently at 9.8% nationally, begins to decline, absent any changes to monetary policy.

For Kevin Jacques, chairman of finance at Baldwin-Wallace College in Cleveland and a former Treasury Department economist, that might not occur until the latter part of 2010 at the earliest. Judging from the past two recessions, job creation lags the start of economic activity by about 18 months, Jacques said.

Any inflation-related tightening in monetary policy could alter the timing, but the Federal Reserve Board "has pumped enormous amounts of money into this economy, and they are plotting an exit strategy so this won't be inflationary," Jacques said.

"Given what I expect to be continued high unemployment, weak consumer demand and a slow-growing economy," he said, "I don't expect appreciable inflation would be problematic for at least a year down the road."

Tim Yeager, a professor at the University of Arkansas and a former St. Louis Fed economist, gave a somewhat shorter time frame for when the unemployment rate would start to decline, likely by the first quarter of 2010. Both economists said the rate will likely top 10% before then.

If deposit rates remain low until that time, banks will continue to eke out margins from core deposits, particularly if deposit rates do not increase as rapidly as the Fed funds or Libor rates do, said Rich Solomon, a director at Novantas LLC.

"This will only be the case as long as consumers are willing to put their money into the retail banking system and not go elsewhere," Solomon said. "But given all the recent events with money market mutual funds…I think banks won't have to significantly pay up for deposits."

For a year, the government backed more than $2.5 trillion of investments in money market funds, but the Treasury allowed that guarantee to expire last month.

There is a downside to a low interest rate environment — banks also aren't getting paid as much on the selective loans they are currently making, said Aaron Fine, a partner in the retail and business banking practice at Oliver Wyman Group, a New York management consulting unit of Marsh & McLennan Cos.

"With a low interest rate environment like this, it's very challenging for banks to make money without taking some form of risk, whether it be credit risk or interest rate risk," Fine said. "The banks that aren't able or willing to take on that risk are going to be challenged."

Frank Terzuoli, a managing principal at the consulting firm Capco in New York, said loan pricing may start to increase somewhat once credit losses peak. "Generally, the risk has to go down before prices go down," Terzuoli said. "So if banks can extract a higher price for loans" and deposit rates remain low, "they will benefit from spread increases."

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