FrameworkTechniqueBankingMacro and rates
Net interest margin is made on the deposit side, and deposit betas say how
The idea
A bank's margin is interest earned less interest paid, over earning assets. When the policy rate rises, what the bank earns reprices quickly; what it pays depends on how much of the rise it passes to depositors, the deposit beta. The Fed note on the 2022 cycle shows the large banks with lower betas, more securities on the asset side than in 2004, and a falling share of non-interest-bearing deposits as customers moved money to earn a yield. Bank coverage, FIG and equity research interviews turn on this mechanism, and the note supplies the real numbers to argue with.
A bank's margin in a hiking cycle is decided by how slowly it reprices its deposits, measured as the deposit beta.
When it works
Bank earnings, FIG coverage, and any interview that asks how rising rates affect a bank.
When it may fail
Low betas are also a sign of depositors who could leave, which is what March 2023 showed. Margin and liquidity pull in opposite directions, and the note covers only the 27 largest banks.
How to use it
For a bank, compute the cumulative deposit beta from its filings: the change in its deposit cost over the change in the policy rate. Compare it with peers before saying whether its margin is defensible.
Where it came from
Research Is This Time Different: How Are Banks Performing during the Recent Interest Rate Increases Compared to 2004-2006? · Anya Kleymenova, Lori Leu and Cindy M. Vojtech, Board of Governors of the Federal Reserve System (FEDS Notes)
What the source says. Net interest margin is interest income less interest expense over average earning assets; non-interest-bearing domestic deposits fell from 18 to 14 percent of funding in the 2022 cycle, and deposit betas were lower at the larger banks.
Connected ideas
Takes it further
Deposit betas kept rising after March 2023, but the run did not change their pathThe 2023 runs redistributed deposits towards the largest banks and exposed a pricing gap that already existed; they did not reprice the system.
Says something similar
A bank run is a maturity mismatch, not a solvency problemA bank fails when its liabilities come due faster than its assets, which can happen to a solvent bank.
Concepts
Put it to work on L3VLUP
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