Pub. 7 2019 Issue 2

www.uba.org 10 Deposit Betas I n science class we were taught that pressure is the applica- tion of force against an object. As bankers, we are constantly experiencing this phenomenon with our depositors and rates. Today, presidents, CFOs and other risk managers across the country are sharpening their pencils and focusing on how important their institution’s deposit rates impact net interest margin and bottom-line. In Asset Liability Committee (ALCO) lingo, the term “beta” is used to describe the relationship between deposit rates versus their sensitivity to the change in short-term interest rates. It’s been a while, but since December 2015 the Federal Open Market Committee (FOMC) has increased the federal funds tar- get rate nine times totaling 225 basis points to the current level of 2.5 percent. Up until last year, the general feeling was that deposit betas were much lower when compared to previous rate cycles. Those feelings were in large part confirmed as banks calculated deposit rates ranging less than 20 percent on their deposit rates versus historic cycles usually ranging from 30-45 percent. Many industry experts have studied why deposit betas have been subdued this time versus past cycles. Some reasons include: the massive amount of bank reserves versus histori- cal levels, increased regulation, higher non-interest cost, and management’s desire to maintain margins levels consistent with what they’ve experienced over the last two decades. Customers are starting to pay more attention since the four hikes last year and the fact that competitive rates are now above inflation rates around 2 percent, implying a pickup in real earning. Toss in growing funding needs and changing customer demand compe- tition (think Fin Tech) and that gives you the perfect recipe for higher deposit betas. By Matt Harris, CFA, Senior Vice President at The Baker Group