In previous updates, we’ve highlighted the impact of rising rates on liquidity in the banking sector. The Fed’s most aggressive tightening cycle in the past four decades, combined with quantitative tightening, has drained deposits from the system. As a result, competition among banks for deposits is increasing, which has led to sharp rise in core deposit rates.
Historically, core deposit rates rise slowly when market rates rise because banks benefit from sticky deposit bases and prefer to earn the spread. During the 2015-2018 rate hike cycle, the effective federal funds rate (EFFR) increased from 0.12% to 2.40%, while the national average savings rate barely changed from 0.06% to 0.09% (see figure below), giving the industry a deposit beta of 1.3%.
This time around, however, increased competition and demand for deposits has forced more banks to compete on rate. In the current 2022 rate hike cycle, the EFFR has increased from 0.08% to 3.83%, and the national average savings rate has already increased from 0.06% to 0.24%, a 4x increase within one year, resulting in an industry deposit beta of 4.8% so far.
Further rate hikes, continued draining of deposits, and increased competition for funding will likely push core deposit rates higher in 2023. While increased funding costs will cut into bank net interest margins, institutions will also benefit from increased interest income from their securities and loans portfolios.
Paolo and the ModernFi Team
Change from two weeks ago
Sources: FHLB Advances are an average of FHLB Boston, FHLB Chicago, and FHLB Des Moines. Brokered CDs are an average of Fidelity and Vanguard. Listed CDs provided by National CD Rateline. US Treasurys and LIBOR provided by WSJ. SOFR provided by CME.
Figure is constructed using weekly data from the FDIC’s National Rates and Rate Caps database and the St. Louis Fed’s FRED interest rates database. National deposit rates are the average of rates paid by all insured depository institutions and credit unions for which data is available, with rates weighted by each institution’s share of domestic deposits.
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