Deposit beta measures how sensitively a bank's deposit costs change when market interest rates change. A common cumulative form is:
Deposit beta = Change in deposit cost ÷ Change in benchmark interest rate
If a bank's total deposit cost rises 100 basis points while the chosen benchmark rises 400 basis points, the cumulative beta is 25%.
Deposit beta is useful because deposits are a major funding source for banks. The speed and magnitude with which deposit pricing follows market rates can materially affect Net Interest Margin.
There is no single standardized deposit beta
Deposit beta is an issuer-defined analytical metric, not a standardized GAAP ratio. Banks can differ in:
- benchmark rate, such as the federal funds target or effective rate;
- starting and ending dates;
- rising-rate versus falling-rate cycle definitions;
- total deposits versus interest-bearing deposits;
- average versus spot deposit cost; and
- treatment of deposit mix changes.
A bank can therefore report a 30% beta under one convention while another bank reports a different number from economically similar pricing behavior. Historical deposit beta is not a forecast of future beta.
Up-cycle and down-cycle beta
Banks often separate deposit beta into rising-rate and falling-rate cycles. In a rising-rate cycle, a lower beta can indicate that deposit costs increased more slowly than benchmark rates. In a falling-rate cycle, investors may focus on how quickly deposit costs can be repriced downward.
The interpretation is not symmetric. Customer behavior, competitive pricing, deposit mix, contractual floors, and the timing of rate changes can differ across cycles.
Example
Suppose a bank's total cost of deposits rises from 0.40% to 2.00% while its benchmark rises from 0.25% to 5.25%.
- Deposit-cost change: 160 basis points
- Benchmark-rate change: 500 basis points
- Cumulative deposit beta: 32%
That does not mean every deposit account repriced by 32% of the benchmark move. It is an aggregate relationship across the bank's chosen deposit population and period.
What can change beta
Deposit beta can be affected by the mix of noninterest-bearing deposits, savings and money-market accounts, time deposits, brokered deposits, customer concentration, liquidity needs, competitive intensity, and management pricing decisions.
That is why deposit beta should be read with Cost of Deposits, uninsured-deposit exposure, loan growth, liquidity, and NIM rather than used as a standalone bank-quality score.
Sources
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Use reported financials and issuer definitions as context rather than treating one deposit beta as a standardized score.
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