--- title: "Cost of Interest-Bearing Deposits: definition, formula, and thresholds" description: "This is the average interest rate a bank pays on the deposits that carry interest (savings, money market, NOW, and time deposits) excluding noninterest-bearing checking. It is a sharper read on deposit pricing than the all-in cost of funds." canonical_url: https://www.bankregreports.com/glossary/cost-of-interest-bearing-deposits/ source: BankRegReports category: "Income & Expense" units: "%" schedule: "Schedule RI" --- # Cost of Interest-Bearing Deposits > This is the average interest rate a bank pays on the deposits that carry interest (savings, money market, NOW, and time deposits) excluding noninterest-bearing checking. It is a sharper read on deposit pricing than the all-in cost of funds. ## Formula ``` Cost of Interest-Bearing Deposits = Interest Expense on Deposits (annualized) / Average Interest-Bearing Deposits ``` Interest expense paid on deposits is annualized and divided by the average balance of interest-bearing deposits. Because it excludes noninterest-bearing accounts from the denominator, it isolates the rate paid on the deposits that actually cost the bank interest. ## Why it matters Deposits are most banks' cheapest funding, and their cost is the single biggest driver of the net interest margin in a rising-rate environment. A bank whose interest-bearing deposit cost climbs faster than peers is either competing hard for money or losing cheap deposits and replacing them with pricier ones, both of which squeeze the margin. ## How to read it This cost tracks short-term market rates with a lag. In a low-rate world it may sit well below 1%; after rate increases it can rise above 3%-4%. What matters is the level relative to peers and the deposit beta, how much of each market-rate move the bank passes through to depositors. ## Thresholds | Range | Reading | What it means | |---|---|---| | Well below peers | Strong | Low-cost, sticky deposit franchise. | | Near peer median | Normal | Deposit pricing in line with the market. | | Above peers | Watch | Paying up for deposits; margin pressure. | | Well above peers | Elevated | High funding cost erodes the margin. | ## Worked example A bank paying $18 million of annualized deposit interest on $600 million of average interest-bearing deposits has a 3.0% cost. A peer at 2.2%, helped by a larger base of noninterest-bearing checking, funds its loans more cheaply and defends a wider margin. ## Questions ### How is this different from the cost of funds? The cost of funds spreads interest expense across all interest-bearing liabilities, including borrowings, and is sometimes quoted over all funding including free checking. The cost of interest-bearing deposits looks only at deposits that pay interest, isolating deposit pricing from borrowing costs and noninterest-bearing balances. ### What is a deposit beta? Deposit beta is the share of a change in market rates that a bank passes through to its deposit rates. A low beta means the bank can hold deposit costs down as rates rise, protecting its margin; a high beta means costs climb quickly with the market. ## Sources - [FFIEC Call Report Schedule RI (Income Statement)](https://www.ffiec.gov/sites/default/files/data/reporting-forms/FFIEC031_FFIEC041_202606_i.pdf) (PDF) - [FFIEC UBPR User's Guide - Asset Yields and Funding Costs](https://www.ffiec.gov/data/ubpr) ## Related metrics - [Cost of Funds](https://www.bankregreports.com/glossary/cost-of-funds/): Cost of funds is the interest rate a bank pays, on average, for the money it lends and invests: annualized interest expense divided by average funding from deposits and borrowings. It is the bank's own cost of money and the expense side of net interest margin. - [Net Interest Margin](https://www.bankregreports.com/glossary/net-interest-margin/): Net interest margin (NIM) is a bank's interest income minus its interest expense, annualized and divided by its average earning assets, expressed as a percentage. It measures the spread a bank earns on its lending and investing, the core of how a bank makes money. - [Interest-Bearing Deposits](https://www.bankregreports.com/glossary/interest-bearing-deposits/): Interest-bearing deposits are all deposits on which a bank pays interest: savings, money market, NOW, and time accounts. They are the costed portion of the funding base, the complement to noninterest-bearing demand deposits. - [Total Interest Expense](https://www.bankregreports.com/glossary/total-interest-expense/): Total interest expense is everything a bank pays for its funding, interest on deposits and on borrowings. It is the cost side of the spread business and the line that surges fastest when rates rise. ## About this document This is the markdown twin of the page named in `canonical_url` above. Source filings are public record; the cleaning, normalization, cross-source linkage, and derived metrics are BankRegReports' own. Attribute with a link to the canonical URL. Markdown twins are published for editorial content only. Institution data pages do not have them. For data at scale use the API, which is documented at https://www.bankregreports.com/api/ and specified at https://www.bankregreports.com/openapi.json. 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