Deposit Beta

Deposit beta is a measure of how much of a change in market or policy interest rates a bank passes on to the rates it pays on deposits. A beta of 0.3 means that when the policy rate rises by one percentage point, the bank's deposit rate rises by 0.3 points on average. Banks, analysts and supervisors use it to describe a bank's pricing power over its depositors and to model how its funding costs will respond to monetary policy.

The term borrows the word "beta" from finance, where it describes sensitivity to a benchmark. Deposit beta is closely tied to a bank's net interest margin and to the value of its deposit franchise: a low beta means cheap, stable funding when rates rise. It is also a key assumption in measuring interest rate risk in the banking book, because it determines how quickly deposit costs reprice.

Suppose the price of fuel goes up by 10 cents a litre and a taxi company raises its fares by only 3 cents. The company is passing on 30 per cent of the increase. Customers who care a lot about price may switch to another taxi firm, while loyal or busy customers stay.

A bank faces the same choice when interest rates rise. It can raise the rate it pays savers by the full amount, by part of it, or not at all. Deposit beta is simply the share it passes on. A low share is good for the bank's profits but risks savers moving their money elsewhere.

Deposit beta for a period is calculated as:

• $\Delta \text{Deposit rate}$ is the change in the bank's average rate paid on deposits, or on one deposit product, over the period.
• $\Delta \text{Policy rate}$ is the change in the central bank's policy rate, or another benchmark such as the federal funds rate, over the same period.

Suppose a central bank raises its policy rate from 0.25 per cent to 4.25 per cent, an increase of 4.00 points, and a bank's average cost of interest-bearing deposits rises from 0.10 per cent to 1.50 per cent, an increase of 1.40 points. The deposit beta is 1.40 ÷ 4.00 = 0.35. Measured from the start of a rate cycle, this is called a cumulative beta; measured quarter by quarter it is an incremental beta.

Betas are often calculated product by product. Over the same 4.00-point rise, the bank's online savings account rate might climb from 0.20 to 3.80 per cent, a beta of 3.60 ÷ 4.00 = 0.90, while its branch passbook account moves from 0.05 to 0.45 per cent, a beta of 0.10. The overall figure of 0.35 is a weighted blend of such products, so a shift in the mix of balances can change the bank-wide beta even if no product rate changes.

• Deposit mix. Non-interest-bearing current accounts and small retail deposits usually have low betas, while large corporate and wholesale deposits and term products such as certificates of deposit have high ones.
• Competition and alternatives. When high-yield online accounts, money market funds or treasury bills pay much more, banks must raise rates or lose funds.
• Customer behaviour. Digital banking makes switching easy, which tends to raise betas; customers who value convenience or relationships accept lower rates.
• The bank's own needs. A bank with strong loan growth or weak liquidity pays up for funding, raising its beta.
• Stage of the cycle. Betas are typically low early in a tightening cycle and climb as higher rates persist, and they are often asymmetric, with deposit rates falling faster when policy rates are cut.

Deposit betas shape how policy rate changes reach households and firms. Research on the "deposits channel" of monetary policy has argued that because banks raise deposit rates less than policy rates, savers move money out of banks when rates rise, which reduces bank lending. In the 2022 to 2023 tightening cycle in the United States and Europe, betas started low and then rose as depositors moved balances into higher-yielding products, a shift described under deposit migration. The episode also showed that deposits with low betas can still leave quickly when depositors worry about a bank's safety, especially uninsured deposits.

Deposit beta is a backward-looking average, and past betas may not predict future behaviour, particularly when technology or competition changes. Bank-wide betas hide large differences between products and customer groups, and they say nothing about deposit volumes, which may fall even when rates are held down. Because banks' interest rate risk models depend on assumed betas and deposit lives, supervisors challenge these assumptions, and an assumption that proves too low can make a bank's interest rate position look safer than it is.