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Deposit Promotions at what Cost? Measuring Marginal Cost of Funds

As rates continue to rise, it is critical to deploy a better metric to compare the costs of rate based deposit raising strategies against one another, and against alternative marketing or investment spending.

As banks continue to grow loans, they are seeking different avenues to maintain deposit growth at the same pace. Already we are seeing that the betas associated with promotional MMDA accounts are surpassing the historic industry’s experience early in the cycle. A deeper worry is that the Marginal Cost of Funds (mCOF) — the total cost of incremental deposit-raising after taking marketing, cannibalization and changes in duration into account — is for many banks unsustainable. The Marginal Cost of Funds in the current rising rate environment threatens to render certain aggressive loan growth goals uneconomic from a funding perspective alone. ...

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