Income & Expense
Cost of Interest-Bearing Deposits
Also known as Cost of IB 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.
How is Cost of IB Deposits calculated?
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 does Cost of IB Deposits matter?
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 do you interpret Cost of IB Deposits?
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.
What is a good Cost of IB Deposits?
| Range | Label | Interpretation |
|---|---|---|
| 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
Frequently asked
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
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