Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

As anyone who has spent time working in the financial industry knows, conversations with people outside of it can be tricky. Sports, religion, politics, the weather -- sure, all that's fine. But start talking shop and the eyes glaze over quickly, especially if you sprinkle in Greek letters like alpha, theta and gamma.  

There is, however, one piece of Greek-lettered financial jargon that the off-Wall Street crowd may want to acquaint themselves with: It's called "deposit beta" and it's actually a pretty easy concept to understand. Deposit beta refers to how much the interest rate on bank accounts will change when broader market rates move. And as even those among us with the glazed-over eyes probably know by now, there's likely a very important Federal Reserve interest-rate increase looming on the horizon.  

So if the Fed increases rates by 25 basis points, or a quarter of a percentage point, a deposit beta of 100 percent would mean that the rate on your savings account also goes up 25 basis points. Is that likely to happen? Ha, yeah right. 

Here are what analysts at Goldman Sachs estimate the deposit betas will be for a handful of U.S. banks:

A Greek Lesson for Savers
When Fed liftoff occurs, banks won't pass along all of the higher interest rates to savers.
Source: Estimates from Goldman Sachs analysts based on company disclosures.
Note: BAC's is described as "40-odd %," RF's as "55%-65%" and BBT's as "60%+"

One of the biggest causes of sour grapes among critics of the Fed's near-zero interest rate policy has been that savers have been punished.  And that punishment is unlikely to end right away. The best guess seems to be that it may take more than one or two rate increases for customers to benefit from deposit betas as high as those above, so the initial liftoff may be more alluring for bank shareholders than savers. When it comes to money market funds, forget it. Many of them have been waiving management fees to keep paying positive interest rates, so they are likely to have no -- or very low -- deposit betas until rates rise enough that they can start collecting fees again. 

Connecting the Dots
The 'dot plot' of policy makers' forecasts for the Fed funds rate show it reaching 3.375% by end of 2018.
Source: Federal Reserve, Bloomberg data
Note: Forecasts are as of Sept. 17. Next update is Dec. 16.

When it comes to regular savings and checking accounts, a lot of other unknowns are clouding the picture. First, it has been more than a decade since the Fed started an interest rate-increase cycle, and a lot has changed in the interim. Physical bank branches are approaching obsolescence when it comes to demand from typical retail customers. Mobile phones and the Internet have replaced bank tellers for more and more customers. So while earning a few more bucks from a savings account may not have inspired the masses to go out and switch accounts in past tightening cycles, these days a switch can be done without leaving the couch. 

Banks will be keeping both eyes on their competitors to see what their post-liftoff deposit rates look like and whether they help attract new customers. Kessel Stelling, the head of Synovus Financial Corp., summed it up best for the industry when asked about the issue during a Bank of America conference last month:

Question: When you think about this cycle versus 2004 to 2006, do you think that the action might be more immediate given sort of the options online, mobile banking, for customers to move money around? How do you factor that? 

Stelling: So the real answer is, we don't known and no one else knows. 

Here's what JPMorgan Chase CEO Jamie Dimon said about deposit betas back in July:  

It's a unique circumstance when you're at zero. There are a lot of things that happen when rates go to 25 basis points that you will pass very little of that on. And we also see that -- we'll see that in money market funds, we'll see that in some forms of deposits, et cetera. The beta gets much higher as rates go up. 

Analysts at Goldman Sachs estimate that for more than 90 percent of households in the United States, an interest-rate increase of 50 basis points is worth only about $40.  For three-fourths of American households, a 50 basis point increase in rates on certificates of deposit is worth about $100, they estimate. So the incentive to switch accounts will be pretty low for those first two rate increases, suggesting banks will be able to hold deposit rates low during the initial phase of tightening.   

In other words, those sour grapes aren't likely to get any sweeter until at least the middle of next year.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net