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Diving Into Deposit Betas

Welcome to 2024, where we find ourselves still trying to process what happened in 2023.

A new RMA Journal article by Venkat Veeramani and Jim Lentino looks at deposit betas—those all-important calculations that measure the degree to which banks pass fed funds rate increases through to customers.

It’s a fascinating deep dive that explains in detail why understanding deposit betas is critical to managing your institution’s funding costs—a lesson some banks learned the hard way last spring.

We urge you to read the entire piece, but here’s a brief summary of what to look for when evaluating deposit rates and deposit betas, and positioning balance sheets, going forward:

Digitization: The rise of digital banking allows customers to rate-shop easily, influencing deposit rates. The 2023 crisis highlighted the impact of digital platforms and social media on deposit runoffs, emphasizing the need for advanced analytics that account for technological advancements and customer behavior.

Deposit Concentration Risk: Considering the potential for a swift loss of deposits to higher-yielding alternatives, banks should monitor concentrated deposit bases. Granular analysis is crucial, especially when certain segments of the deposit base are impacted differently.

Scenario and Sensitivity Analysis: Deposit beta assumptions play a pivotal role in interest-rate scenario analysis. The 2023 liquidity crisis underscored the importance of stress testing and scenario analysis in informing decisions on deposit rates and managing liquidity risk.

Fed Monetary Actions: The Fed’s policies and competing fixed-income alternatives impact funding costs, potentially elevating deposit betas for longer. Quantitative easing (QE) and tightening (QT) programs add complexity to deposit beta dynamics, affecting the speed of increase or decrease.

These factors, coupled with promotional strategies and risk appetite considerations, emphasize the dynamic nature of deposit betas throughout interest rate cycles, prompting the asset-liability committee, senior management, and the board to align on strategic balance sheet decisions.