Deposit beta
Sector Deep DivesThe proportion of a policy rate rise that a bank passes through to its depositors.
If policy rates rise 200 basis points and a bank raises deposit rates by 60, its deposit beta is 30%. It measures how much of a rate rise the bank keeps rather than passes on.
A low beta means the bank keeps most of the increase, so net interest margin expands sharply. It is the single most important variable in whether rising rates actually help a given bank.
It depends on the funding franchise. Sticky retail current accounts held for convenience have very low betas; corporate treasury deposits and wholesale funding reprice almost immediately. Two banks with identical loan books can therefore respond to the same rate move very differently.
Betas are not static. They rise through a hiking cycle as depositors notice and shop around, so early margin expansion frequently gives back ground later, and assuming a constant beta across a cycle overstates the benefit.
Worked example
Policy rates rise 200 basis points. A bank raises its deposit rate from 1.0% to 1.5%, so it passed on 50 of the 200, a deposit beta of 25%.
On 40,000 of deposits, that saves 600 a year against a full pass through. On a bank earning 1,200 of net interest income, this is not a detail.
Betas rise through a cycle as depositors shop around, so assuming this 25% holds for three years typically overstates the benefit.