Now is a good time to adjust your core deposit modeling assumptions

Originally published 9/29/2007 © 2021 Olson Research Associates, Inc.

I think a minus 50bp adjustment to Fed Funds caught many of us a bit off-guard. Especially if you consider the headlines less than 6 months ago talking about inflation worries and the potential need for the Fed to tighten again. It just goes to show you that the crystal ball isn't always right (and no, we haven't really improved upon it either). Alan Greenspan himself echoed this sentiment in one of his many interviews promoting his new book. On last Wednesday's The Daily Show Greenspan said, "forecasting 50 years ago was as good or as bad as it is today".

Which brings me to the real point of this post. I wish I could have listened in on every one of our community bank client's pricing meetings this week. What kind of discussions did you have? Did you decide to move your NOW, Savings, and/or Money Market rates? If so, by how much? The full 50 basis points down? Or do you feel that local market pressures are going to force you to keep rates up?

How much (or how little) you move these core rates defines what we call your "beta factor" for core deposits. It's a measure of your bank's sensitivity and it's a critical assumption when modeling your Net Interest Earnings at Risk.

Computing your bank's beta factor for a given account is easy. Take the amount you lowered rates this week and divide it by the change in Fed Funds (-50bp). For example, if you lowered your core savings account rates by an average of -25bp then your beta factor for Savings is 25 divided 50 or 50%.

This week take the time to document your change in pricing, and provide that data to us when we update your A/L BENCHMARKS model for September 30.