The loaded cost of each deposit product per dollar the bank can lend, and the posted rate at which wholesale money becomes cheaper.
The all-in cost of a deposit is the rate paid plus deposit insurance and servicing cost, less fee income, less what the liquid assets held against it earn, divided by the share of the deposit the bank can actually lend. On an illustrative bank whose deposits pay a weighted 2.31 per cent, the all-in cost is 2.87 per cent per usable dollar, against 4.60 per cent for term wholesale money. The gap is far narrower than the posted rates suggest on the money market book, and nearly gone on time deposits.
Worked in full in Bank Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A treasurer deciding whether to raise a deposit rate or take a wholesale advance has to compare like with like. The wholesale rate is all-in: the money arrives, it can be lent, and it does not need a branch, a statement or a call centre. A deposit pays a lower rate but carries costs the rate does not show, and part of it has to sit in cash or securities against the day it leaves. The comparison only works once both are expressed as the cost of one dollar the bank can put to work.
| Product | Balance | Rate paid | Servicing cost | Fee income | Held liquid |
|---|---|---|---|---|---|
| Non-interest checking | 1,200 | 0.00 | 2.20 | 0.80 | 10% |
| Savings and interest checking | 2,400 | 1.80 | 0.70 | 0.15 | 10% |
| Money market, largely uninsured | 1,500 | 3.60 | 0.25 | 0.00 | 25% |
| Time deposits | 1,100 | 4.20 | 0.15 | 0.00 | 5% |
| Total | 6,200 | 2.31 |
Deposit insurance is assessed at 0.05 per cent of balances. The liquid assets held against deposits earn 3.40 per cent. Term wholesale funding costs 4.60 per cent and needs no buffer. The share held liquid is the bank's own policy, set by how likely each balance is to leave in a stress: highest on rate-sensitive uninsured money, lowest on time deposits that cannot leave before maturity without a penalty.
The formula
All-in cost = (rate + insurance + servicing − fees − held liquid × buffer yield) / (1 − held liquid). In Excel: =(C2+$H$1+D2-E2-F2*$H$2)/(1-F2).
Money market, worked through
Gross cost on the balance: 3.60 + 0.05 + 0.25 − 0.00 = 3.90 per cent. The 25 per cent held liquid earns 25% × 3.40 = 0.85, leaving 3.05 per cent of the balance. Only 75 per cent of it can be lent, so the cost per usable dollar is 3.05 / 0.75 = 4.07 per cent.
Non-interest checking
0.00 + 0.05 + 2.20 − 0.80 = 1.45; less 0.34 earned on the buffer, 1.11; divided by 0.90, 1.23 per cent. The free account is not free.
The whole book
Of 6,200 of deposits, 790 is held liquid and 5,410 is usable. The all-in cost is 155.0 a year, 2.87 per cent of what can be lent. The same 5,410 borrowed wholesale would cost 248.9.
| Product | Rate paid | All-in | Advantage, posted | Advantage, all-in | Break-even rate |
|---|---|---|---|---|---|
| Non-interest checking | 0.00 | 1.23 | 4.60 | 3.37 | 3.03 |
| Savings and interest checking | 1.80 | 2.29 | 2.80 | 2.31 | 3.88 |
| Money market | 3.60 | 4.07 | 1.00 | 0.53 | 4.00 |
| Time deposits | 4.20 | 4.45 | 0.40 | 0.15 | 4.34 |
| Book | 2.31 | 2.87 |
The break-even rate is the posted rate at which a product costs exactly as much as wholesale money. The money market book can pay 4.00 per cent, 0.40 more than today, before a wholesale advance becomes cheaper; time deposits have only 0.14 of room. A treasurer who matches a competitor's 4.50 per cent certificate of deposit is paying more than wholesale for money that also needs a branch to raise.
The franchise sits in the first two lines. Checking and savings provide 3,240 of usable funding at 1.23 and 2.29 per cent, and together with the other products save 93.8 a year against wholesale. That saving, capitalised over the life the deposits are expected to stay, is what a buyer pays for as a core deposit intangible, which is why what a buyer actually pays for a bank turns so heavily on the deposit book.
| Rate paid | 10% held | 25% held | 40% held |
|---|---|---|---|
| 3.00 | 3.29 | 3.27 | 3.23 |
| 3.60 | 3.96 | 4.07 | 4.23 |
| 4.20 | 4.62 | 4.87 | 5.23 |
When the deposit's gross cost, rate plus insurance and servicing, is below what the buffer earns, holding more liquidity lowers the all-in cost slightly; when it is above, every extra point of buffer is expensive. At 40 per cent held liquid, the money market break-even rate falls to 3.82 per cent. The buffer share is the input that moves most when a book is reclassified as less stable, which is what happens to uninsured, rate-sensitive balances after a regional bank failure. The coverage side of the same money is in the uninsured deposit coverage ratio.
Comparing the posted rate with the wholesale rate. On the money market book that shows an advantage of 1.00 point when the true one is 0.53; on checking it shows 4.60 when the true figure is 3.37. The first error makes rate-sensitive deposits look cheaper than they are and leads a bank to chase them; the second hides that the cheapest deposits are expensive to service, and that their value depends on fees as much as on the rate.
The buffer yield matters too. If the liquid assets earn 3.00 instead of 3.40 per cent, the money market all-in cost rises from 4.07 to 4.20 per cent. A bank that buys longer securities to earn more on the buffer lowers this figure and raises its interest rate risk.
The free workbook for this case sets the loaded cost of a deposit against wholesale money beside the margin, the transfer-pricing curve and the deposit beta.
Because deposits carry servicing cost and deposit insurance, and part of every balance must be held in liquid assets that earn less than loans. On an illustrative money market book paying 3.60 per cent, adding 0.30 of insurance and servicing and holding 25 per cent liquid at 3.40 per cent gives 4.07 per cent per dollar the bank can lend.
When a product's posted rate exceeds its break-even rate: the rate at which its all-in cost equals the wholesale rate. Against 4.60 per cent wholesale, the illustrative money market book breaks even at 4.00 per cent and time deposits at 4.34. Matching a 4.50 per cent certificate of deposit costs more than an advance.
No. A zero-rate account still costs insurance and servicing, partly offset by fees. On an illustrative bank, 2.20 per cent of servicing, 0.80 of fees and a 10 per cent liquidity buffer give an all-in cost of 1.23 per cent per usable dollar. It is still the cheapest money the bank has, 3.37 points below wholesale.
This article is one calculation from Bank Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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