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Deposit Risk Management: Strategies and Metrics for Finance Directors

Deposit risk management is the process of monitoring, analyzing, and mitigating risks tied to a bank’s deposit base, including liquidity pressures, rate sensitivity, concentration risk, and depositor behavior. Proactive deposit monitoring improves stability, compliance, and strategic decision-making.

Deposit risk management is a crucial practice for banks and credit unions. An institution that practices good deposit risk management is always aware of whether it has the amount of safe and reliable liquidity needed to fund financial products, as well as daily operations.


Deposit risk management isn’t just about protecting bank longevity. Its practice is essential to customer sentiment, client retention, and regulatory compliance.


The best deposit risk management strategies mimic real-world scenarios as much as possible. This can entail accounting for the high degree of volatility brought about by customer behavior, rising betas, and uninsured concentration risk.


Below, we’ll discuss financial risk management trends and practical strategies to consider for optimal protection.

Table of Contents

Why Deposit Risk Management Matters

Banks require sufficient funding to fulfill their obligations to customers. Customer deposits are not the only way for banks to get financing, but they are the most cost-effective.


If an institution finds itself without sufficient funds, it may resort to borrowing money from other, more expensive avenues, which can lead to reputation damage, regulatory fines, or even closure.


Deposit risk management is not always straightforward. It’s subject to unpredictable human and market behavior. For example, macroeconomic events could lead to an onslaught of customers withdrawing more money than expected. Or if the Federal Funds Rate rises, it could motivate customers to move more money into high-yield accounts.


As the financial world becomes increasingly complex and unpredictable, many institutions have refocused their efforts on precisely managing deposit risk.


The concentration of funds in non-maturity deposits leading into the 2022 rising rate cycle has presented unique opportunities for the banking industry to gain a deeper understanding of their customers and members’ behavior.


Market trends and risk management statistics can serve as a litmus, but they alone are not enough. To gain insight into evolving trends and behaviors, it’s critical to adopt appropriate technology and resources to ensure a robust deposit monitoring process is in place.

Types and Sources of Deposit Risk

Every institution faces deposit risks, but knowing the most common types helps you respond with confidence. These include:

  • Deposit Concentration and Uninsured Deposits: Heavy reliance on a few large or uninsured accounts heightens withdrawal risk and weakens liquidity ratios, especially for balances above FDIC or NCUA insurance limits.
  • Rate Sensitivity (Deposit Betas): Deposit betas measure how quickly funding costs rise with market rates. High betas can pressure margins and profitability if institutions must increase payouts rapidly.
  • Remote Deposit Capture (RDC) Risks: While convenient, RDC introduces fraud and operational risks such as duplicate deposits. Ongoing monitoring ensures customer ease doesn’t compromise liquidity.

Key Metrics to Monitor

Tracking the right deposit metrics gives your board and asset and liability committee (ALCO) the visibility needed to make proactive decisions. Key measures include:

  • Deposit Flows (Inflows and Outflows): Banks should track daily transaction flows to understand how much money customers are depositing or withdrawing. A weekly cadence spots trends and shifts early, in advance of a larger liquidity problem.
    • Lesson: In 2022, when the Federal Reserve raised interest rates in an attempt to mitigate inflation, many banks assumed their customers’ deposits were “sticky.” They were surprised to see customers move on quickly to competitors who were offering higher returns on savings products.
  • Deposit Beta (Rate Sensitivity): Institutions should measure how fast deposit costs rise with market rates (deposit beta). In the event of a Federal Reserve hike, competitors may need to increase the rates they pay on deposits to retain customers. Equally important, institutions need to understand their ability to deposit rates when market rates fall. If liquidity needs remain high or competition is strong, institutions can experience heightened margin constraints as asset pricing falls with market rates while deposit costs remain high.
    • Lesson: Modern research indicates that banks that adopt dynamic beta modeling are more effective in anticipating and mitigating market shifts.
  • Customer Tenure and Behavior: Depositor “stickiness” has long been a reliable metric to indicate risk, but it’s never been more challenging to measure. While there are more tools on the market than ever, there’s also more competition.
    • Lesson: Highly-publicized events like the Silicon Valley Bank collapse of 2023 have made customers more cognizant of bank instability. Banks that prioritize deeper customer relationships are most resilient.
  • Concentration Ratios: Watch for reliance on a handful of large deposits, especially if they are over the FDIC insurable limit. In the event of a crisis, these funds will be the first to be depleted. This can be disastrous for a financial institution if one substantial withdrawal is equivalent to ten moderate withdrawals.
  • Liquidity Coverage from Deposits: Scenario modeling helps us expect the unexpected. Regularly test how deposits support liquidity ratios under stress scenarios, so you can answer questions with confidence and feel prepared for a wide variety of situations.
    • Lesson: Institutions with strong deposit-to-loan ratios enter board discussions with greater confidence, leading to forward-thinking, collaborative, and less defensive outcomes.

Strategies for Mitigating Deposit Risk

With the right approach, banks and credit unions can strengthen stability and reduce exposure. Proven strategies include:

  • Diversify the Depositor Base: Reduce reliance on large accounts by diversifying your deposit mix with a combination of retail and business deposits. If deposits are spread out across thousands of small and mid-sized accounts, you can withstand unpredictable withdrawal fluctuations.
    • Lesson: Throughout history, we can see that regional banks with balanced depositor bases see fewer liquidity shocks. In the 2008 Global Financial Crisis, smaller regional banks remained relatively stable, as their depositors were mostly local households and small businesses.
  • Strengthen Product Mix: Retail and reciprocal term deposits help build stability. Reciprocal deposits enable banks to distribute funds across multiple partner institutions, which enhances FDIC and NCUA insurance coverage and fosters customer confidence. Term deposits lock deposits in for a set period of time, increasing predictability.
    • Lesson: A lesson from the 2023 Banking Crisis reveals that banks utilizing reciprocal products maintained access to insured deposits during stress events. Had they not split their deposits up, they would have exceeded the insurable limit, possibly putting their customers’ deposits and their longevity at risk.
  • Disciplined Pricing: There is a reason why “chasing hot money” has a negative connotation. While it might be enticing and could even result in a short-term payoff, it leaves your margins vulnerable to an over-aggressive rate hike.
    • Lesson: It’s tempting to hike rates to chase customer stickiness, but the correlation is not always there. It’s best to view customer loyalty as a multifaceted issue with various dependencies.
  • Monitor Large Depositors: If you do have large depositors among your customer base, it’s a good idea to undergo frequent stress tests to cement your safety in the case of large simultaneous withdrawals. The quality of your asset and liability management is only as good as the creativity of your possible scenarios.
    • Lesson: While a crucial component of any monitoring framework, an overreliance on market changes and the corresponding impact on deposit behaviors puts financial institutions in a purely reactive position.
  • Improve Customer Communication: In an era where it’s never been easier to switch banking platforms, there are still ways to guarantee your customer’s business. Providing an exceptional customer experience — where you both reach out frequently and make yourself accessible to outreach — can help improve customer loyalty.
    • Lesson: A McKinsey report demonstrated how banks with the best deposit management made customer communication a priority.
  • Integrate Deposit Risk Into ALM: Asset and liability management (ALM) programs can help you run more sophisticated risk scenarios and plan for a future rife with uncertainty. Link deposit assumptions into ALM modeling.
    • Lesson: Banks running integrated stress tests understood earlier how rising rates would erode margins and liquidity buffers.

Common Challenges and How to Solve Them

Even well-run institutions encounter hurdles in deposit risk management. The most common challenges — and how to overcome them — are:

  • Forecasts Not Balancing or Lagging: Effective risk management predictions require reliable data to be useful. If your asset-side forecasts (i.e., loan payments) don’t match the liability-side (deposits, bonds), you can run into dangerous data mismatches. Many ALM systems employ overly simplistic behavioral models or exhibit delays or gaps between real events and data.
    • Pro Tip: Use Empyrean Solutions’ ALM integration to refresh deposit assumptions dynamically and ensure balance. Instead of relying on static (and possibly stale) data assumptions, Empyrean integrates directly with your institution’s source of truth and integrates balance sheet forecasting into one central dynamic environment.
  • Limited Visibility Into Deposit Data: Monitoring deposit changes in near-real time is essential for giving stakeholders relevant data for decisions. The pace of shifts in the recent rate cycle has been striking compared with the prior decade’s stability. In an uncertain environment, understanding the near-term impact of market rates and economic outlook is critical for effective risk management.
    • Pro Tip: Deposit IQ centralizes data and highlights trends daily, rather than monthly.
  • Overreliance on Manual Models: Spreadsheets are accessible, relatively straightforward, and tempting to rely on. However, Excel-only approaches increase the likelihood of errors and slow response times.
    • Pro Tip: Risk, finance, and asset and liability committee (ALCO) teams all play an essential part in risk management, but can only effectively work together if they’re working off the same baseline. Empyrean Dataverse provides a single source of truth for consistent reporting and board discussions.
  • Regulatory and Board Pressure: Institutions must provide transparency in explaining the assumptions behind deposit forecasts. Regulators and examiners don’t just want the final numbers; they want teams to show their work to prove forecasts aren’t built on outdated or fabricated models.
    • Pro Tip: Integrated audit trails within Empyrean make it easier to justify deposit assumptions under scrutiny and remove the stress of endless documentation.

Building a Robust Deposit Risk Framework

Effective deposit risk management helps organizations feel secure, a confidence that reverberates throughout their customer base. The uncertainties of a new economic environment underscore the need for a more comprehensive and iterative approach to alternative scenario modeling and stress testing.


An integrated risk and performance management process enables bankers to efficiently incorporate adjustments to NMD assumptions in a uniform manner and understand the impact on the institution’s financial health and corresponding risk appetite.


Monitoring nowadays must be proactive, and systems must be integrated to ensure effective management. Only then will institutions face stability and resilience.


Empyrean’s Deposit IQ, ALM, Budgeting & Planning tools are trusted by banks and credit unions nationwide to protect liquidity and prepare for a myriad of financial futures. To see an example of how Empyrean helps banks like yours stay ahead of deposit risk, stream our deposit analytics webinar.

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FAQ: Deposit Risk Management

How Often Should Banks Assess Deposit Risk?

Ideally, banks should continuously monitor their deposit risk using a real-time or near-real-time dashboard. Regular stress tests should be run on a monthly or quarterly basis.

What Is Deposit Concentration Risk?

Deposit concentration risk determines how vulnerable a bank (or credit union) is to the withdrawal of a small number of large deposits. These deposits can be concentrated across similar customers, industries, or regions.

What Is Deposit Beta, and Why Does It Matter?

A deposit beta assesses how much a financial institution pays in the event of a change in market interest rates. Several factors, including deposit types, industry type, competitive landscape, regulatory norms, and corporate philosophies, will influence whether a deposit beta is high or low.

How Does Deposit Risk Tie Into Liquidity Management?

Deposit risks directly impact whether banks have the necessary liquidity to meet customer demands and fund internal operations. If most deposits are uninsured (over $250,000), rate-sensitive, or concentrated in one industry or company, they can be quickly withdrawn. This could lead to a liquidity crunch for banks.

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