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Balance Headwinds Continue

This Month In Commercial Banking

It was only a year ago that the market was betting the Fed would raise rates 75-125 basis points (bp) for all of 2022. With banks sitting on historic levels of excess liquidity, 80% of CDA participants were focused on keeping deposits betas down – even if that meant seeing some deposit balances leave. 

What a difference a year makes.  

2022 ended unlike any prior year in the commercial deposits world. In an effort to tame 40-year highs in inflation, the Fed hiked rates 425 bp while pulling hundreds of billions of dollars of liquidity out of the market through quantitative tightening. The result: unprecedented balance runoff in commercial deposit books and higher-than-expected betas despite excess bank liquidity.  

The average commercial deposit book ended the year down 11.7%. The best performers managed a flat year while the bottom quartile by growth saw their books shrink by more than 20%. Meanwhile, average MMDA rates rose to 2.13% in December, up from 0.10% at the start of the year – a beta of 48%. ECR betas remained low at 8%, but ECR balances were down an average of 20% YoY as companies looked to optimize working capital to free up yield-seeking balances. 

What’s in store for 2023? Markets expect a less eventful year from the Fed, with 50 bp of additional hikes through March before rates level off and fall modestly in the second half of the year. Even if that is the case, historical behavior suggests betas will continue to rise as back-book customers look to reprice their deposits. Quantitative tightening, moreover, will provide continued pressure on overall liquidity levels, keeping competition high.  

Given these factors, Curinos believes the most likely outcome will be another year of negative commercial deposit growth and betas sailing past prior cycle levels across major commercial products. As we saw in 2022, however, market conditions can change quickly, so it will be critical again this year to plan for a base scenario as well as significantly different conditions.  

Figure 1:
Beta Change: Prior Rate Cycle vs. Current Cycle​

Source: Curinos CDA
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