Deposit beta: Deposit beta is the share of a change in market rates that a bank passes through to its depositors.
How it is calculated
The change in a bank’s cost of deposits over a period divided by the change in the benchmark rate over the same period. A beta of 0.40 means 40 basis points of a 100 basis point move reached depositors.
Formula
Deposit beta = change in cost of deposits / change in benchmark rate
How to read it
Beta decides whether a rate cycle helps a bank or hurts it. Betas start low in a tightening cycle and rise as depositors notice, which is why a bank’s margin usually widens early in a cycle and compresses later in the same one.
The common mistake. Assuming the beta coming down matches the beta going up. Deposits reprice upward far more readily than downward, so the cutting cycle beta is almost always the lower of the two and a bank that modelled them as equal will be short.
Go deeper
- Deposit beta explained
- What is a good cost of funds for a bank?
- BankingLens pricing and what a subscription adds: percentile rank against the bank’s own FFIEC peer group, fourteen quarters of trend, and the flags an examiner reaches for first.
See also. Cost of deposits, Cost of funds, Core deposits, Noninterest-bearing deposits.
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