Banks are granting rate exceptions to their commercial clients of 500 bp or more, so it can be easy to overlook that most banks’ portfolios still contain a significant back book. According to the latest Curinos data, 46% of interest-bearing (IB) DDA balances and 24% of money market demand account (MMDA) balances industry-wide were under 300 bp (see chart).
These back books present headwinds for banks seeking to meet pass-through targets for falling-rate betas. Bringing down rates on their balances would create a heightened risk of customer attrition, and the replacement cost of acquiring new balances would be significantly higher. Meanwhile, these back-book balances might still “wake up” on their own and demand even better pricing. And non-interest-bearing balances continue to flow at a modest rate into IB, putting further pressure on net interest margin and betas.
What can be done? Developing a deeper understanding of elasticity and primacy via analytics can inform more surgical pricing decisions. We also suggest taking a hard look at treasury management pricing to see the extent to which the migration of ECRs to interest-bearing can be slowed down.
Rate Band Distribution By Product
Significant back-book balances will present headwinds to banks’ pass-through targets for falling-rate betas.
