Cost of Deposits
Average interest rate a bank pays on its deposit base.
Definition
Cost of deposits measures the weighted average interest rate a bank pays across all deposit types—checking, savings, money market, and CDs. It is a critical component of funding cost and directly impacts net interest margin. Rising rate environments increase deposit costs as customers demand higher yields.
Formula
Cost of Deposits = Total Interest Paid on Deposits / Average Total Deposits × 100
Why It Matters
Deposit cost management is one of the most important levers bank management can pull. Banks with strong brand loyalty and large non-interest-bearing deposit bases enjoy structurally lower funding costs and better margins.