NY Fed Blogs Again on Deposit Betas
The Federal Reserve Bank of New York's "Liberty Street Economics" blog published an update entitled, "Deposit Betas: Up, Up, and Away," which explains, "Deposits make up an $18 trillion market that is simultaneously the main source of bank funding and a critical tool for households' financial management. In a prior post, we explored how deposit pricing was changing slowly in response to higher interest rates as of 2022:Q2, as measured by a 'deposit beta' capturing the pass-through of the federal funds rate to deposit rates. In this post, we extend our analysis through 2022:Q4 and observe a continued rise in deposit betas to levels not seen since prior to the global financial crisis." (See our April 4 News, "NY Fed: MMFs Move with Monetary Policy.") The post continues, "In addition, we explore variation across deposit categories to better understand banks' funding strategies as well as depositors' investment opportunities. We show that while regular deposit funding declines, banks substitute towards more rate-sensitive forms of finance such as time deposits and other forms of borrowing such as funding from Federal Home Loan Banks (FHLBs). We estimate the evolution of deposit betas using data from bank holding company (BHC) regulatory filings (FR Y-9C).... Although we focus on the rates paid on interest-bearing (IB) deposits, we also consider all deposits in several figures. We use the industry-level of deposits given our interest in the overall pass-through of monetary policy to deposit rates, but we will explore size differences in a future post." Finally, the blog adds, "Deposit rates continue to lag the fed funds rate, but the pass-through of policy rates is quickly approaching levels not seen since the early 2000s. The rapid rise in rates has resulted in a fall in overall deposit balances, a tightening of funding ratios, and an increase in non-deposit borrowing. Banks have been managing the deposit runoff using more attractive time-deposit rates and other borrowings. Given the increase in fed funds rates since 2022:Q4 and the wide gap between deposit rates and the fed funds rate, we expect that deposits will continue to shift into higher rate categories that are more responsive to monetary policy."
