What deposit behavior reveals about bank resilience

After an extended period of rate volatility, margin compression, and liquidity pressure, financial institutions are once again being challenged to adapt. Bank leaders are looking for ways to manage risk and drive growth. Increasingly, they are finding those strategies through a deeper understanding of deposit behavior and its impact on balance sheet performance.

Deposits remain the cornerstone of bank strategy, according to Rob Newberry, Senior Consultant at Abrigo, even as the dynamics around them evolve. “The deposits are the foundation of bank funding,” Newberry says. “Depending on how your institution is growing, you have to have enough funding to continue to fund the loan growth that you have. Are you growing at the pace of your deposit growth, or are you outgrowing it?”

Why deposit behavior has become a strategic priority

For many banks, regulatory requirements or periodic ALM reviews have historically driven the use of deposit modeling. But that approach overlooks how deposit behavior directly influences liquidity planning, loan growth capacity, pricing decisions, and ultimately profitability.

“Accurate modeling enhances risk management and strategic planning,” Newberry says. “One of the biggest things we want to understand from an analytics perspective is how long those deposits are going to be around, because that impacts your ALM assumptions and a lot of other decisions downstream.”

The need for accurate modeling is particularly acute for community and regional banks, where funding options may be more constrained and customer concentration risks are higher. Newberry points to demographic exposure as an often-overlooked factor that can impact smaller institutions. “A good chunk of your deposit balances may be represented by people over seventy years old,” he notes. “How much longer are those deposits going to be around, and how does that wealth transfer to the next generation?”

Understanding decay, stability, and longevity

At the center of modern deposit analysis is decay—the rate at which balances naturally run off over time. While the concept is familiar, Newberry emphasizes that its strategic implications are often underestimated.

“Decay rates measure the rate at which deposit balances diminish over time,” he explains. “It’s exactly like prepayments on the loan side. Deposits decline because customers withdraw funds, move money internally to other accounts, or shift balances to different investment types.”

By pairing decay rates with weighted average life and effective duration, banks gain a clearer picture of how reliable their funding really is under changing market conditions. This distinction becomes especially important when separating core balances from surge balances, which are the funds that are more likely to leave when rates or conditions change.

“Surge balances are an inflow of deposits triggered by an event, and they’re likely to flow back out relatively quickly,” Newberry says. “These balances are usually rate sensitive and can move at any time.”

Failing to identify surge behavior can leave institutions exposed, particularly if temporary liquidity is mistakenly treated as long-term funding.

Pricing strategy, cannibalization, and margin risk

Deposit pricing remains one of the most visible tools banks use to compete for funding, but it is also one of the most dangerous if used without insight. Newberry cautions that raising rates to attract new money often triggers internal movement rather than true growth.

“When you raise rates on a new account, you have to understand how much ‘old’ money is moving into that account,” he explains. “That internal transfer increases your interest expense, and sometimes you’re paying a lot more than you realize for the next ten million dollars.”

This concept of marginal cost is critical in an environment where margins are already under pressure. “Sometimes paying up for deposits might actually destroy your margin instead of strengthening your balance sheet,” Newberry says. “It becomes a balancing act between growth and profitability.”

Aligning deposit pricing behavior with loan repricing by using beta and lag thoughtfully can help institutions protect net interest margin while remaining competitive.

Who’s in charge of deposits?

Ultimately, the value of deposit analytics lies in how effectively insights are translated into action. That requires clear ownership and consistent focus.

“One of the first questions we ask when we work with banks is: who is actually in charge of your deposits?” Newberry says. “You might have multiple people in charge of loans, but on the deposit side, it’s often fragmented. Someone really must be focused on deposits every day if you want to be successful.”

By integrating deposit behavior, pricing dynamics, and demographic trends into ALM and forecasting processes, banks can plan ahead. In an uncertain environment, proactive institutions are better positioned to compete against a growing list of competitors while strengthening their long-term resilience. For more insights on deposit strategy, register for the ABA’s March webinar, From Rates to Results: Turning Economic Shifts into Strategy, designed for senior financial leaders seeking to move beyond reactive management and toward a more data-driven approach.