Deposits are the lifeblood of retail and community banking, yet they are fundamentally unstable. Unlike wholesale funding, which is contractual and predictable, deposits rest on the belief that your bank is safe and that alternatives (money market funds, short-term Treasuries, other banks) aren't more attractive. When either assumption breaks, deposits walk out the door—fast.
This module frames the core problem: deposits are not fixed liabilities. They carry optionality. Depositors hold call options on your balance sheet. When rates rise, when your bank faces stress, or when yield-seeking opportunities appear elsewhere, they exercise those options. Your job as an ALM practitioner is to model that behavior with enough precision to manage liquidity and earnings risk.
Why this matters: A Treasury yield that spikes 200 basis points doesn't just affect your asset repricing—it triggers deposit flight. The 2022–2023 rate cycle demonstrated this starkly. SVB collapsed not because it couldn't meet withdrawal demands at face value, but because once confidence eroded, deposits evaporated faster than management could respond. Regional banks lost 5–8% of deposits in weeks. Even strong banks with low loan losses and positive earnings faced deposit pressure because depositors rationally migrated to risk-free alternatives paying 5% overnight.
This is not market risk alone—it is liquidity risk and behavioral risk combined.
Core Concepts
Deposit optionality: Depositors can withdraw or transfer funds with minimal notice (demand deposits) or short notice (savings accounts). They do this when the opportunity cost of staying rises. That opportunity cost depends on three factors: (1) the rate they could earn elsewhere, (2) their perception of your bank's safety, and (3) the friction cost of moving deposits (search time, relationship value, switching costs).
Core vs. non-core deposits: Core deposits are those tied to relationships—payroll, direct deposit setup, linked checking and savings, credit product borrowing. They're stickier. Non-core deposits are price-sensitive rate-seekers: brokered deposits, deposits from other banks, large institutional cash. During rate normalization, core deposits deplete last; non-core deposits leave first.
Relationship to other ALM modules: Deposit behavior feeds directly into liquidity modeling (Module 29), funding strategy (Module 28), and pricing decisions (Module 25). If you don't model deposit decay correctly, your liquidity buffer is a fiction. If you don't understand deposit betas (the sensitivity of your deposit rates to market rates), your earnings hedge is incomplete.
What You'll Learn
This module introduces the behavioral and economic foundations of deposit modeling. You'll understand why simple run-off assumptions are dangerous, how to build a deposit beta curve, and why the 2022–2023 cycle exposed so many banks' blind spots. By the end, you'll see deposits not as a static liability class, but as a dynamic funding source that requires constant monitoring and modeling.
The Problem: Why Simple Assumptions Fail
Traditional ALM models operated on an assumption that would prove dangerous when rates finally rose: deposits could be modeled like bonds with a constant duration and stable rate spread. This framework held through 2015–2021 because the environment was artificially suppressed. Short rates were effectively zero by central bank design, long rates were artificially constrained by Fed policy, and depositors faced a brutal choice: keep funds at their bank earning minimal returns, or move to cash (which was yielding essentially nothing elsewhere). Under these conditions, deposit betas remained predictably low—typically just 20–30%—and deposit run-off was minimal and orderly. Banks could forecast deposit balances with considerable confidence, treating deposits almost as a quasi-equity funding source.
Then 2022 happened, and the entire model collapsed.
When the Federal Reserve raised rates by 400 basis points over nine months—the fastest hiking cycle in decades—depositors faced a genuine economic choice for the first time in over a decade. They could earn 4.25% on a money market fund or 0.5% at their bank. For a depositor with $1 million, this was a $40,000 annual opportunity cost to stay at the bank. The economic value of maintaining deposits at low-yielding institutions plummeted almost overnight. And unlike bond investors, who face transaction costs, potential capital losses, and tax consequences when redeploying funds, depositors could act on this value gap instantly. Moving funds from a bank to a money market fund takes minutes, costs nothing, and creates no tax liability.
Silicon Valley Bank's collapse in March 2023 was the dramatic punctuation mark, but the deposit migration story began much earlier. In mid-2022—well before any major bank failures—regional banks experienced deposit outflows for the first time since the 2008 financial crisis. Banks like Huntington Bancshares, KeyCorp, and Comerica reported deposit losses of 3–5% over a few quarters, far exceeding the stable patterns of the prior decade. By early 2023, even strong banks like JPMorgan Chase, which actually managed to grow deposits overall, experienced intra-month swings of 2–3% of their total deposit base as sophisticated depositors continuously rotated funds into Money Market Mutual Funds in response to improving yields.
The mechanical driver was straightforward: every 1% increase in the risk-free rate created approximately a 4–5% opportunity cost gap between what depositors earned at their bank and what they could earn in liquid alternatives. That gap was too large for relationship factors to overcome.
The Behavioral Foundation
Deposit behavior at its core is a rational-choice economic problem, though one with significant stickiness parameters that vary across customer segments and relationship quality. A depositor essentially stays with their bank if the value calculation tilts in favor of staying:
Value of staying ≥ Cost of switching + Value of bank relationship
This deceptively simple formula conceals significant complexity. The value of staying includes not just the interest rate paid on deposits, but also the safety premium depositors assign to the bank and the convenience value of integrated services. The cost of switching includes the time required to move funds, the risk of errors in the transition, the complexity of shifting established direct deposit relationships, and any residual psychological attachment to the current bank. The value of the bank relationship encompasses multiple dimensions: the ability to access credit when needed, the convenience of linked checking and savings accounts, the employer direct deposit infrastructure that may already be established, and sometimes genuine personal relationships with branch staff.
In 2022–2023, the switching calculus underwent a traumatic recalibration. For a small business owner holding a $1 million deposit at a regional bank earning 0.25% while money market funds offered 4.25%, the opportunity cost was $40,000 annually. The time to switch (approximately zero—a few hours of work) was trivial compared to this sum. The relationship value—access to a business credit line, linked payroll processing, embedded treasury systems—had to exceed $40,000 to make staying rational. For most depositors, it did not.
This is precisely why core deposits held up better than non-core deposits during the crisis. A small business owner with a payroll account, an established commercial banking relationship, and embedded treasury systems faces genuine switching costs and real value from the relationship. A corporate treasury manager with deposits at five banks simultaneously faces none of these frictions. These large, rate-seeking corporate depositors proved to be the first wave of deposit outflows in 2022, leaving for money market funds where they could earn the full risk-free rate.
Modeling the Behavior: Beta, Decay, and Threshold Rates
Practitioners model deposit behavior through three complementary lenses: deposit betas that capture repricing sensitivity, run-off rates that model actual deposit loss, and threshold effects that reflect non-linear behavioral shifts.
Deposit Beta: The Repricing Elasticity
Deposit beta measures the elasticity of your deposit rates to changes in risk-free benchmarks like the fed funds rate, SOFR, or Treasury bill yields. A beta of 0.40 means that when the federal funds rate rises by 100 basis points, your deposit rate rises by 40 basis points on average. These betas vary significantly by product—savings accounts historically showed betas around 50%, checking accounts (especially non-interest-bearing demand deposits) showed betas of just 10%, while money market accounts and CDs showed betas of 60–80%. Betas also vary dramatically by depositor type. Retail depositors historically showed betas around 40%, while commercial depositors—who shop rates aggressively—showed betas of 70–90%, and institutional depositors essentially repriced at market rates (betas near 100%).
During the historically calm 2015–2021 period, these betas held relatively stable:
- Savings accounts: 25–35%
- NOW accounts: 15–25%
- Money market accounts: 40–60%
- Retail CDs: 60–80%
- Commercial demand deposits: 70–90%
The 2022–2024 rate cycle shattered these historical relationships. As rates rose rapidly and depositors faced legitimate economic incentives to leave, competitive pressure forced banks to reprice deposits far more aggressively than historical precedent suggested. Betas surged dramatically:
- Savings accounts: 70–85%
- NOW accounts: 60–75%
- Money market accounts: 95–110%
- Commercial deposits: 95–110%
These elevated betas reflect two simultaneous forces. First, there was genuine demand from depositors for higher yields—the opportunity cost gap simply became too large to ignore, and depositors voted with their feet. Second, competitive dynamics among banks intensified as each institution tried to hold deposits by raising rates faster than historical patterns would suggest rational.
Deposit Run-Off and Decay: The Volume Component
Not all deposits reprice; some leave entirely. When opportunity costs rise sharply—as occurred during 2022–2023—a portion of deposits decays into competing institutions. Historical run-off was benign, approximately 2–3% annually from natural attrition. During the acute phase of 2022–2023 when rates rose fastest, quarterly run-off reached 5–8%, representing an annualized decay rate that was multiple times historical experience.
Banks model run-off as a time-dependent and rate-dependent function that captures both natural attrition and rate-driven outflows. The formulation typically separates base decay (the natural quarterly/annual attrition from life events, business changes, and normal customer churn) from rate-sensitive decay (the additional outflow driven by opportunity cost gaps):
Run-off Rate = Base Decay + Rate-Sensitivity Function
Base decay might be 1% per quarter for savings deposits (representing the natural background loss of customers). Rate sensitivity adds to this: for every 100 basis points of opportunity cost gap between what your bank pays and what risk-free alternatives offer, banks typically observe an additional 0.5–1.5% per quarter in outflows, with the sensitivity varying by product type and franchise strength.
Consider a concrete example: BankX holds $10 billion in savings deposits with a measured deposit beta of 0.30. When the federal funds rate stands at 0.25% and BankX is paying 0.10% on savings, the risk-free alternative (money market mutual fund) is yielding 5.25%. The opportunity cost gap is therefore 5.15%. With an elasticity of 0.5% quarterly outflow per 100 basis points of opportunity cost, the implied rate-sensitive outflow is 5.15% × 0.005 = 2.6% per quarter. Adding the 1% base decay rate, the total expected run-off reaches 3.6% per quarter. This simple model actually captured the 2022–2023 reality far better than the traditional models that assumed stable run-off based on multi-decade historical averages.
Threshold Rates and Non-Linear Behavior: The Cliff Effect
Deposit run-off is decidedly not linear across all opportunity cost levels. Below a certain threshold—perhaps 150 basis points of opportunity cost—deposit outflows remain mild as relationships hold and switching costs bind. Above that threshold, behavior shifts dramatically. You observe acceleration in outflows as depositors overcome inertia and actively rotate funds. Many banks have observed a behavioral cliff: when the Treasury bill to deposit rate spread exceeds 200 basis points, deposit decay accelerates from a baseline of 0.5% to 2% per month. This discontinuous jump likely reflects the psychological threshold at which depositors overcome procrastination and switching costs by explicitly deciding to reoptimize their cash management.
Real-World Data: The 2022–2023 Cycle
The theoretical frameworks described above found powerful confirmation in actual bank disclosures and Federal Reserve data during the 2022–2023 cycle.
JPMorgan Chase, the largest U.S. bank, faced intense competitive pressure yet managed consumer deposit growth of approximately 1% year-over-year (comparing 2023 to 2022) due to the breadth of its franchise and extensive product linkage. However, this aggregate stability masked dramatic compositional changes. Non-interest-bearing deposits fell 6–7% as depositors freed up transaction balances that had inflated during the zero-rate era, while higher-yielding money market account balances grew 8.3%. JPMorgan's deposit rate paid increased from an average of 0.68% in 2021 to 2.31% in 2023—a 163 basis point increase—but this represented far less than the 400+ basis point rate increase, demonstrating the franchise power of JPMorgan's depositor base.
SVB Financial's deposit collapse represents the opposite extreme. SVB's deposits fell from $198 billion at the end of 2022 to $91 billion by March 2023—a catastrophic 54% loss in just three months. This was not a traditional liquidity crisis in the classic sense; it was a crisis of confidence compounded by an underlying asset-liability mismatch. SVB held $117 billion in securities, many of which had unrealized losses due to rising rates. Once sophisticated venture-backed depositors learned about these underwater securities and observed that money market funds offered 5% with zero credit risk, they withdrew deposits. The bank failed not on the first day of the crisis, but after a bank run that accelerated over 48 hours as depositors coordinated through venture capital networks and media coverage.
Huntington Bancshares, a major regional bank with roughly $140–150 billion in deposits, entered the 2022 hiking cycle expecting cumulative deposit betas of 25–27% based on experience from prior cycles. By year-end 2023, realized through-the-cycle betas had reached 40%+ significantly exceeding internal forecasts. In 10-K disclosures, Huntington attributed this to competitive pressure from other banks and money market funds that intensified throughout 2022–2023. Deposit mix shifted: non-interest-bearing deposits fell 11.2% while money market accounts and savings grew 8.3%. The average deposit cost rose from 0.59% in 2022 to 1.94% in 2023. The experience validated the behavioral shift: deposit betas are non-linear and accelerate as rate cycles mature.
Ally Financial, a digital bank with no branch network and therefore no local relationship advantages, faced direct competition from money market funds without any offsetting convenience value. Ally raised online savings rates from 0.5% in early 2022 to 4.0% by late 2023, yet still experienced deposit losses. Year-end 2023 showed deposits down 12% year-over-year. Ally's all-in deposit cost increased 380 basis points in a single year, representing the cost of competing for deposits purely on rate with no relationship differentiation.
Implications for ALM
The deposit behavior framework described above has profound implications across multiple dimensions of asset-liability management.
Liquidity Impact: When deposits decay at accelerating rates during stress, the funding base shrinks. If you forecast $10 billion in deposits remaining stable, but empirically 5% runs off each quarter when rates rise, your actual available funding is $9.5 billion and shrinking further each quarter. The gap between forecast and reality must be filled with wholesale funding—Federal Home Loan Bank advances, certificates of deposit, brokered deposits, or asset sales. This funding substitution often occurs at substantially higher rates, creating compound pressure on net interest margins.
Earnings Impact: If your actual deposit beta exceeds your model assumption by 50 basis points, your cost of funds rises accordingly. On a $100 billion deposit base, a 50 basis point beta error translates to $50 million in annual earnings impact for every 100 basis points of rate movement. A bank forecasting 40% betas and experiencing 65% betas can easily miss earnings targets by $50–100 million per quarter in a volatile rate environment.
Valuation Impact: The deposit base represents not just funding but also intrinsic franchise value. Unexpected deposit runoff and higher-than-expected deposit betas reduce the funding base available to support earning assets and force substitution of lower-margin wholesale funding. This compresses return on assets and return on equity, which leads to multiple compression in equity valuations. During 2023, regional bank stock prices fell 30–50%, driven substantially by deposit beta shocks and deposit level uncertainty that investors had not fully anticipated.
Module Connections
This foundational module on deposit behavior cascades into everything that follows in the Deposits track. Module 22 dives deep into the technical challenge of estimating and tracking deposit betas across different methodologies. Module 23 examines the structural deposit migration that occurred during 2022–2024, documenting the shift from bank deposits to money market funds and the implications for the equilibrium deposit beta and mix. Module 24 addresses the operational challenge of NMD (non-maturity deposit) modeling for both interest rate repricing and liquidity forecasting. Module 25 covers pricing strategy—the tactical decisions about how to price deposits competitively to slow decay without destroying margins. Module 26 and 27 examine the wholesale and brokered deposit alternatives that replace decaying core deposits. Finally, Module 28 (covered earlier) examines how deposit forecasts drive term funding strategy and management of the maturity wall.