Understanding Deposit Betas
Deposit beta is the percentage of a market rate increase that a bank passes through to its depositors. If the federal funds rate rises 100 basis points and a bank's average deposit cost rises 35 basis points, its deposit beta is 35%. The lower the beta, the more of the rate increase the bank keeps as margin.
Why Betas Vary
Deposit betas are not uniform. They differ by deposit type, by bank, and by where you are in the rate cycle.
By type, non-interest-bearing deposits have a beta of zero by definition (they pay no interest regardless of where rates go). Savings accounts have low betas, often 15% to 25%. Money market accounts run higher, typically 40% to 60%. CDs have the highest betas, frequently 70% to 90%, because they reprice entirely at maturity and customers shop rates actively.
By bank, institutions with strong retail franchises and loyal customer bases show lower overall betas than banks competing primarily on rate. A community bank in a small town with limited competition may maintain a 30% cumulative beta through an entire tightening cycle. A bank in a competitive metropolitan market or one reliant on online deposit gathering might see betas of 50% or higher.
By cycle timing, betas tend to start low and accelerate. In the early stages of a rising rate cycle, banks delay passing increases through to depositors. As the cycle matures and competition for deposits intensifies, betas rise. The cumulative beta at the end of a cycle is often much higher than the initial beta suggested.
How to Track Betas
Banks don't report deposit betas directly, but you can estimate them. Compare the change in the bank's average cost of deposits (from the income statement or quarterly supplement) against the change in the federal funds rate or another benchmark over the same period. Do this cumulatively from the start of the rate cycle, not just quarter to quarter, to get the full picture.
Management teams often discuss deposit betas on earnings calls, and their commentary is worth tracking. Early-cycle statements like "we expect betas to remain low" frequently prove optimistic as the cycle progresses.
Connecting Betas to Valuation
Deposit betas directly affect net interest income forecasts. A bank with a 30% cumulative beta retains 70 cents of every dollar of rate increase as additional margin. One with a 55% beta retains only 45 cents. Over a 300-basis-point rate cycle, that difference compounds into a substantial earnings gap.
When building an earnings model for a bank, the deposit beta assumption is one of the most sensitive inputs. Small changes in the assumed beta produce large swings in projected net interest income, which is why analysts spend significant time debating this single variable.
Related Articles
- Bank Deposit Composition — The deposit mix determines the bank's blended deposit beta
- Deposit Franchise Value — Low deposit betas are a key indicator of high franchise value
Related Metrics
- Cost of Deposits — Deposit beta is the rate of change in cost of deposits relative to market rate changes
- Net Interest Margin (NIM) — Deposit betas determine how much of a rate increase flows through to NIM
- Cost of Funds — Overall funding betas combine deposit betas with wholesale funding repricing