Deposit Beta: a Worked Example

A bank's deposits are not one product. Transaction accounts pay little or nothing and are held for payments; savings accounts pay a rate the bank sets and changes when it chooses; term deposits are priced against market rates for their term and repriced at each rollover. When the policy rate moves, each responds differently, and the beta puts a number on the response.

The book beta is the one that reaches the margin, and it moves for two reasons: because the bank changes its rates, and because customers move money between products. A bank can hold every product rate still and see its book beta rise as balances leave transaction accounts for term deposits. A quarter's beta can also mislead, since banks lag the first rises and catch up later; analysts compare cumulative betas from the same starting point.

Early in a rising cycle, banks pass little through on accounts customers hold for convenience. Later, three things push the beta up: competitors bid for savings, customers notice the gap between at-call and term rates and move, and new money arrives in the better-paying products. Australia's last cycle shows the pattern. The Reserve Bank of Australia found that from February 2022 to December 2023, as the cash rate rose by 4.25 percentage points, the average rate on the major banks' deposits, excluding offset accounts, rose by about 3.25 points, around three-quarters, against 40% to 70% in other advanced economies. Term deposit rates rose by about as much as the cash rate, at-call rates by less, and balances shifted towards term deposits, though the RBA put less than 0.20 points of the rise in those banks' overall funding costs down to that shift; most came from higher rates on each product.

Hedging changes when the benefit arrives. Banks commonly treat the stable part of their low-rate deposits as fixed-rate funding and hedge it with a rolling portfolio of swaps, so a rate rise lifts the earnings on those deposits gradually as the hedges roll, rather than all at once. On the way down the same accounts work against the bank: a deposit paying nothing cannot be cut, so the margin narrows as the loan rates fall.

A bank, constructed for this page like every figure in it, has US$12bn of loans, two-thirds at variable rates that reprice in full, the rest fixed and not yet rolled over. They are funded by US$10bn of deposits and US$2bn of wholesale debt that reprices in full. The policy rate rises by 4.00 points. Product rates rise by nothing on transaction accounts, 1.60 points on savings and 3.60 points on term deposits: betas of 0%, 40% and 90%, all the example's. Amounts in US$m.

No product rate changed between the two halves. One-tenth of the deposits moved, the book beta rose by nine points, and three-quarters of the margin gain disappeared. The example leaves out hedging and the fixed loans' eventual repricing, both of which would spread the effect over several years.

The beta is half of a comparison. The other half is how fast the bank's assets reprice: variable business loans priced off a bank bill or base rate follow the policy rate almost at once, fixed-rate loans only when they roll. The net interest margin moves with the gap between the two, not with either alone, which is why a bank with a high deposit beta and mostly variable loans can still widen its margin, and one with a low beta and a long fixed book can see it shrink.

The beta also sits beside behavioural maturity. The first measures what the bank must pay to keep a balance; the second, how long the balance stays. A low beta on a deposit that leaves at the first better offer is worth less than it looks.

DEFINED IN ONE PARAGRAPH → · NET INTEREST MARGIN, WORKED → · FUNDS TRANSFER PRICING →

For a reader of a bank's results, the beta assumption is where a margin forecast is most exposed. A bank that guides to a stable margin while its term deposit share is still rising is assuming the mix shift has run its course; the deposit table in the results shows whether it has.

For a business customer, the beta is why the operating account earns little in a rising cycle and why a treasurer who moves surplus cash into a term deposit or a notice account captures most of the rise. For the bank, a low-beta operating balance is the cheapest funding it has, which is why funds transfer pricing credits it generously and why a relationship that brings the transaction account is priced differently from one that brings only a loan. And as the bank's book beta rises, so does its cost of funds, which in time reaches the margin on business loans at their next review.

HOW TO READ BANK RESULTS → · HOW A RATE CHANGE REACHES YOU → · WHY YOUR BANK REPRICED YOUR LOAN →