The Increasing Importance of Understanding Deposit Betas

In 2022 and 2023, as it worked to tamp down inflation, the Federal Reserve raised the upper limit on the fed funds rate with unprecedented magnitude and speed. In a mere 17 months, the rate rose 525 basis points (bps)—from 0.25% in February 2022 to 5.50% in July 2023. Suddenly, banks were forced to manage the effects of significantly higher interest rates on their balance sheets. Those that strategized successfully—and those that did not—became apparent in a liquidity crisis that…