Wells Fargo's Basis Point Solution

Among the steady drumbeat of negative news for Wells Fargo in the wake of its fake-account scandal, the most troubling headlines may be those telling of lost business because of the bank's shredded reputation.

Illinois, California, Seattle and Chicago are among those that have all announced recently that they were refraining from working with the bank.

This lost business, mostly in municipal-bond underwriting, shouldn't be enough to move the needle much on Wells Fargo's bottom line. The bulk of its business is centered on the banking needs of retail mom-and-pop customers -- and those clients don't issue press releases or write open letters to announce that they're turning their backs on the bank.

So a question that will linger, perhaps even beyond the bank's latest earnings release this week, is how many of these customers will decide to flee.

One hint may be in how often the bank's mobile application is downloaded. The app's rank in iOS and Google Play stores has taken a noticeable hit, sending the gap between it and apps from Bank of America and JPMorgan Chase to the widest level since 2014, according to analysts at UBS. (See Figure 4 at this link.) That is obviously an imperfect measure of consumer behavior, as the analysts pointed out, but it certainly hints at a slowdown in new accounts and engagement among customers.

Wells Fargo has increased deposits briskly in recent years, so it would require a full-scale mutiny for the situation to become acute. However, should an exodus of retail customers become problematic, there is one lever the bank could consider pulling to help keep mom and pop from jumping ship: interest rates on savings and checking accounts and certificates of deposits.

The effect of higher benchmark interest rates -- like the fed funds rate or more variable rates like Libor --- on the rates paid to savers is known as deposit beta.

The conventional wisdom has been that deposit betas would be minuscule -- almost nonexistent -- during the initial few interest rate increases by the Federal Reserve. That would allow banks to benefit from, say, the first 50 basis points of rate increases as they pass along higher borrowing costs to customers but not much of the gain to depositors.

That seems to have been the case when looking at certificate of deposit rates after the 25 basis point increase last year: