In this post, we evaluate how deposits have evolved over the latter portion of the current monetary policy tightening cycle. We find that while deposit betas have continued to rise, they did not accelerate following the bank runs in March 2023. In addition, while overall deposit funding has remained stable, we find that the banks most affected by the March 2023 events are offering higher deposit rates and are growing their deposit funding relative to the broader banking industry.
Monetary Policy and Banks’ Security Losses
The beginning of 2022 saw unique conditions in the banking sector relative to prior cycles. Deposits and reserves were at their highest levels since the global financial crisis (GFC) of 2007-08, while policy rates were effectively at the zero lower bound. These conditions were in part attributable to the unique nature of the COVID recession and the various forms of government support that sought to minimize disruptions to banks, businesses, and households.
The Federal Reserve embarked on a rapid tightening cycle in March 2022 to counter a significant increase in inflation. By March 2023, interest rate increases had reduced the value of various fixed-rate assets, like securities and mortgages, resulting in substantial unrealized losses in the banking sector. Typically, such losses remain unrealized because banks can hold their fixed-rate assets to maturity since these are funded by relatively fixed, long-maturity liabilities (see this April 2023 post for more on this phenomenon). In this case, however, several banks experienced depositor flight in response to solvency concerns.
Given these disruptions, there was a risk that pervasive unrealized losses might inspire a revision in depositor behavior that would imperil the broader banking system by forcing additional institutions to raise deposit rates or seek expensive funding to avoid selling assets and realizing interest-rate-related losses.
Industry Deposit Conditions Appear Stable
The cost of deposits relative to prevailing interest rates has continued to increase, but the pace of change has appeared stable following the events in March 2023. The chart below depicts the change in overall deposit rates relative to changes in the federal funds rates—or the cumulative beta—over the course of the last five tightening cycles for the banking industry. Since 2023:Q1, the cumulative beta of deposits has continued to rise. While the current tighteni