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Over the past two years, bank analysts have increasingly deployed the term “deposit beta” to describe the sensitivity of lenders to customer deposits. A surge of interest rates worldwide has encouraged more depositors to seek better returns. Banks that failed to keep up have been left exposed.
Between spring 2022 and 2023, the US federal funds effective rate soared from almost zero to more than 5 per cent. Not all banks reacted quickly by lifting deposit rates. This was partly due to perceived deposit excess, which banks struggled to parlay into loans or investments.
But banks that relied on relatively cheap financing from depositors, worth $18.2tn in total, soon noticed the shift in depositor behaviour. In the year to mid-April 2023, some $973bn left US banks, according to Federal Reserve data. Often these funds moved to money market funds, which provided higher rates of return.
Deposit betas jumped as a result. Large regional banks such as Zions Bank and KeyBank had an average sensitivity of 12 per cent in the second quarter of 2022. That increased by nearly 10 times by the second quarter of this year, according to data from Fitch.
Curiously, most European and UK banks have not suffered the same fallout. In the UK, a highly competitive market for both retail deposits and mortgages may have encouraged customers to stay put. Average betas there are around 50 per cent, according to Citi, compared with nearly half that a year ago. In France, where there are 55mn government regulated savings accounts (Livret) that track market rates, they are a quarter lower.
Europe’s deposit betas should rise to around 30-40 per cent next year and potentially above 40 per cent in 2025, according to Andrea Filtri at Mediobanca. Even so, those sensitivities would pale in comparison with the sometimes triple-digit betas in the US during the first quarter of 2023.
This was the year in which banks realised that they could no longer take their savers for granted.
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