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At what rate will banks start paying interest on demand deposits?


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Guest Schwab711

Any thoughts on if the rate increases will create a pricing competition for new deposits? Historically, interest on deposits significantly lags rate increases but it has been almost a decade since the last increase.

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At the enterprise wide level, there is a concept called "deposit beta" to measure the sensitivity of the rates banks pay on deposit vs. Fed Funds rate.  in fact it's embedded in all the net interest margin disclosures in the K's of the financials.  It's virtually impossible to disaggregate this information from typical statement of "in a parallel shift of 100 bps, our net interest income will increase/decrease by..".  But for historical rules of thumbs, I've see people use something like 75% for the "super regionals", and as low as 60% for some of the more sticky deposit bases.  But this is at the enterprise level, not just on demand deposits.  It would imply something significantly lower for just the demand deposits.

 

Backward looking number can be derived through study of the historical NIM disclosure in the K's. Things may be quite different in this cycle, as banks will be in general a lot less worried about the money market funds, so deposit beta arguably all shock to the downside, with banks passing through significantly less of the rate increases to depositors.  In fact I would speculate for the first 25 bps, the banks will pass through virtually none of it.  That's the reason they have been rallying every time people speculates that we are closer to that first rate hike.

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