How to calculate deposit beta

Deposit beta measures how much of a change in market rates a bank passes through to depositors. Divide the change in the bank's cost of deposits by the change in a benchmark rate, such as the fed funds rate, over the same period. A 0.40 beta means deposit costs moved 40 basis points for every 100 the benchmark moved.

Every ALCO watches deposit beta, and two analysts at the same bank can get different answers from the same data.

Why deposit beta matters

1. It drives net interest margin forecasts when rates move.
2. It feeds interest rate risk models and deposit pricing decisions.
3. Boards and analysts use it to judge how sticky a bank's deposits are.

The gray area

1. Cumulative or period beta? Cumulative beta measures from the start of a rate cycle. Period beta measures one quarter at a time.
2. Which benchmark? The fed funds target, the effective fed funds rate or another market rate.
3. Which deposits? Interest-bearing deposits only, or total deposits including noninterest-bearing? Including them lowers the beta.
4. Which cost? Average cost for the period, or the spot rate at period end?
5. Promotional rates. Do teaser and exception rates count?
6. Direction. Betas often differ when rates rise and when they fall. Are you measuring one or both?

Core principles

1. Name the beta. "Cumulative interest-bearing deposit beta since March 2022" is a definition. "Our beta" isn't.
2. Fix the benchmark and the start date and keep them for the whole cycle.
3. Calculate by segment. Consumer, commercial, CDs and nonmaturity deposits behave differently.
4. Use the same cost basis as the NIM and cost of deposits figures in the same report.

Calculating deposit beta in one system

1. Pull average interest-bearing deposit balances and interest expense on deposits by period from the core.
2. Calculate the annualized cost of deposits for each period.
3. Take the change in cost of deposits from the start date to the end date.
4. Divide by the change in the benchmark rate over the same dates.

Calculating deposit beta across systems

Balances and expense come from the core and GL, exception pricing often lives in spreadsheets, and the asset-liability model assumes its own betas. When the modeled beta and the observed beta use different deposit categories or benchmarks, nobody can tell whether the model is wrong. Align the categories first, then compare.

How Preql helps

Preql maps how your core, GL and pricing spreadsheets define deposit categories and costs. Finance approves one definition for each beta, with an owner, version history and lineage back to source, so observed and modeled betas can be compared on the same terms.

FAQ

What is a typical deposit beta?

It depends on the bank's deposit mix, market and rate cycle. Compare against your own history and peers measured the same way.

Should noninterest-bearing deposits be included?

Report both if leadership asks for a total deposit beta, but keep the interest-bearing beta as the primary measure. Label each clearly.

Related: How to calculate net interest margin (NIM)

Talk to our team

Want one approved definition of deposit beta across your reports? Book a call with our team.

What happens next: in a 30-minute call, you'll see where your numbers stop matching and why.