A Look at Increasing Deposit Betas in a Rising Interest Rate Environment

Bankers understand that changing interest rates can adversely affect a bank's earnings and capital risk — that became especially clear when rates began rising in the first quarter of 2022. To predict how earnings and capital might change, institutions rely on interest rate risk (IRR) frameworks and modeling approaches built on key assumptions about deposit decay rates, asset reinvestment rates, cash flow timing, and shifts in market interest rates. 

While previous Community Banking Connections articles have covered IRR frameworks and modeling approaches broadly, this article focuses specifically on deposit betas — a critical assumption within IRR models.¹ In particular, it examines deposit beta trends among community banks, analyzing how these trends vary by asset size and geographic location.

Deposit Beta Introduction

In general, deposit betas measure how responsive management's deposit pricing is to changes in market interest rates.² Bank management relies on deposit betas as a key input into the bank's IRR and income models, using them to estimate how interest rate changes might affect the bank's interest income. Based on these results, management may then make corresponding decisions about the bank's balance sheet.³

Many factors, such as competition, tightening liquidity, and responses to the policy rate tightening cycle, contributed to increasing deposit betas in the 2022 cycle. At some institutions, rapidly rising funding costs resulted in the compression of both net interest margin and return on average assets due to interest expenses increasing faster than interest income. Regardless, banks began raising their interest rates paid on deposits.

An institution with a higher deposit beta is more likely to raise the rates it pays on deposits when underlying interest rates rise. As a result, the institution may see its interest income compressed, since the cost of deposit funding increases while returns on existing fixed-rate loans stay the same.

Deposit Beta Calculations

Although a federal funds rate increase began in the first quarter of 2022,⁴ reported institution responses to changes in the federal funds rate lagged approximately two quarters. The observation period for increases in federal funds rate changes is from the third quarter of 2022 through the third quarter of 2024. The observed federal funds rate change over this period is 5.25 percent.

Institutions use specific criteria to calculate their deposit betas, but they generally do not disclose these criteria to the public. Fortunately, a beta proxy can be developed using data from Consolidated Reports of Condition and Income (Call Reports).⁵ National deposit beta results are calculated in Table 1. For the purposes of this article, deposit betas are based on the quarterly difference between third quarter 2022 and third quarter 2024 for each of the deposit categories. This difference is then divided by the federal funds rate change for each deposit category.

National Deposit Betas

National Deposit Betas at Larger Institutions Make a Difference

Using the same approach described earlier, Table 3 categorizes institutions by total assets. Our analysis suggests that, as bank asset size increases, the beta also increases. Third quarter 2024 betas range from a low of 0.08 for Transaction Accounts Cost to a high of 0.70 for Cost of Time Deposits. One possible reason for larger betas at larger banks is that larger banks achieve greater economies of scale and obtain more deposits by paying a higher rate on them.

Deposit Betas by District

Beta variability extends beyond institution size and geography to product line as well, and this pattern holds true across the country. To illustrate this, we examined betas by Federal Reserve District. Table 4 shows the highest betas in bold, revealing that no single District dominates all deposit categories — instead, the District with the highest beta shifts depending on the product type.

Among community banks, for example, institutions in the Second District (New York) led in three categories: Total Retail Deposits Cost, All Interest-Bearing Deposits Cost, and Cost of Time Deposits. The Third District (Philadelphia) took the lead for Transaction Accounts Cost, and the Twelfth District (San Francisco) had the highest betas for Other Savings Accounts Cost. This distribution reinforces that geography alone does not predict deposit pricing behavior — product mix plays an equally important role.

Third quarter 2024 beta ranges by District vary from 0.09 for Transaction Accounts Cost to 0.69 for Cost of Time Deposits.

Conclusion and Implications

Understanding a bank's deposit base is essential to determining how rate changes may affect its profitability, liquidity, and exposure to interest rate risk. Deposit betas offer both institutions and consumers a useful way to estimate how deposit rates move in relation to the federal funds rate.⁶

Deposit betas also provide valuable insight into depositor behavior and pricing dynamics. Community bank senior management can compare their institution's internally calculated deposit betas to national or peer group benchmarks to gauge how sensitive their depositor base is to interest rate changes. A deposit beta significantly above the industry average may indicate greater exposure to rate-driven funding cost pressures, while a beta significantly below average may reflect more stable deposit pricing because of customer loyalty or other market factors. These comparisons help management assess the bank's competitive positioning of deposit sources and identify where pricing strategies may need adjustment.

Beyond peer benchmarking, deposit betas play a critical role in asset and liability management, particularly in IRR modeling. Accurate beta assumptions improve the realism of net interest income and economic value of equity simulations, helping management project how deposit costs and funding pressures will likely evolve across different interest rate scenarios. This is especially important for nonmaturity deposits, which lack contractual repricing terms and instead rely on customer behavior to drive rate sensitivity. By aligning beta assumptions with an institution's actual responsiveness to macroeconomic rate movements, management can strengthen the accuracy of its IRR models and better assess how interest rate shifts might affect the bank's earnings and capital.

ENDNOTES

Austin Golden was a senior supervisory analyst at the Federal Reserve Bank of Philadelphia when this article was written.

¹ Emily Greenwald, “Essentials of Effective Interest Rate Risk Measurement,” Community Banking Connections, Third Release 2013.

² See Greenwald, 2013.

³ Doug Gray, “Interest Rate Risk Management at Community Banks,” Community Banking Connections, Third Release 2012.

⁴ See FEDFUNDS data, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis, accessed October 14, 2026.

⁵ See the following reports at the Federal Financial Institutions Examination Council Central Data Repository’s Public Data Distribution: Total Interest-Bearing (Retail) Deposits’ Cost of Funds (UBPRE106), Transactional Accounts’ Cost of Funds (UBPRE107), Other Savings Deposits’ Cost of Funds (UBPRE108), Time Deposits’ Cost of Funds (UBPRHR55), and All Interest-Bearing Deposits’ Cost of Funds (UBPRE115).

⁶ Ryan Bolig, Susan Maxey, and Donna Thompson, “Navigating the Great Deposit Migration Through Interest Rate Risk Modeling,” Community Banking Connections, First Release 2015.