Banks’ New World: Depositors Get a Bigger Share of Rate Rises

Dial into any bank earnings call these days and you will hear lots of talk about “deposit beta.” The phrase came up 29 times in the presentations following results from four of the largest US banks last week. A metric that analysts have tracked for years has hit the mainstream.

What is deposit beta? Technically, it’s a measure of the pass-through of monetary policy to savers: The portion of the change in the central bank rate that a financial institution passes on to customers via higher deposit rates. But it's also a measure of pricing power: the lower the deposit beta, the better for bank shareholders; the higher, the better for customers.

Deposit beta typically starts low and edges up as rates rise. Depositors tend not to be that sensitive to the first 50 basis points of hikes, and banks can keep most of the benefit to themselves. As rates continue to move up, more of the increase gets shared with customers. “Deposits have beta and gamma,” JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon explained to shareholders back in 2015, referring to an options term that conveys a non-linear relationship.

In that last tightening cycle, between 2016 and 2019, banks ended up passing on close to 40% of Fed rate increases, according to data from the Federal Reserve Bank of New York. Going into the current cycle, analysts anticipated a similar, maybe slightly lower outcome, given how flush banks were with deposits.

Yet few expected as rapid nor as pronounced a shift up in rates as we’re seeing now, a mix that has affected depositor behavior in ways banks struggled to model.

Last week, State Street Corp revealed that it is now passing on 100% of recent rate hikes, taking its cumulative deposit beta to over 70% in the current cycle. Chief Financial Officer Eric Aboaf warned that the pass-through is only going up. “We are going to have a quarter where betas are well above that 100% level,” he said.