Deposit Beta

The percentage of a change in central bank interest rates that a bank passes through to its depositors.

Deposit beta measures the sensitivity of a bank's deposit rates to changes in a central bank's policy interest rate, such as the Federal Funds Rate. It represents the portion of a rate hike or cut that the bank passes on to its customers. For example, if a central bank raises rates and a commercial bank subsequently increases the interest rates on its savings accounts, the deposit beta quantifies that relationship. For financial analysts and bank investors, deposit beta is a crucial driver of net interest margin (NIM) and overall profitability. During the early stages of a rate-hiking cycle, banks typically enjoy low deposit betas because they can quickly raise rates on their floating-rate loans while keeping deposit rates near zero. This lag in passing through rate increases generates significant near-term profits. However, as interest rates remain high, competition for deposits intensifies. Customers begin moving their money from low-yielding checking accounts to higher-yielding alternatives like money market funds or certificates of deposit (CDs)—a process known as cash sorting. This forces banks to raise deposit rates to prevent deposit flight, causing the deposit beta to rise and compressing profit margins. Conversely, in a rate-cutting environment, a high deposit beta on the downside is favorable for banks, as it allows them to quickly lower their funding costs.

The Federal Reserve raises the Federal Funds Rate by 1.50% (150 basis points). In response to this policy change, a regional bank increases the average interest rate paid on its interest-bearing deposits by 0.45% (45 basis points). The bank's deposit beta is calculated as 0.45% / 1.50% = 30%.