Your bank just raised rates. But did your customers' mortgage and deposit rates follow?
The gap between what the market pays and what a bank passes on is where the magic, and the risk, lives.
The Problem
Banks face interest rate risk when market rates and customer rates move asynchronously. A central bank can reprice overnight, but customer deposit rates, mortgage rates, and internal product rates may adjust slowly, partially, or asymmetrically.
That matters to regulators because IRRBB feeds stress testing, economic value sensitivity, earnings sensitivity, and capital adequacy. It also matters to customers because pricing delays influence competitiveness, switching behavior, and trust.
In IRRBB, the uncomfortable question is rarely "did rates move?" The sharper question is "how much of that move actually reached the customer book, and how fast?"
Pass-Through Rate
The pass-through rate, usually written as β, is the proportion of a permanent market rate change that eventually flows into a customer rate.
If β = 0.80, a permanent 1.00% increase in market rates eventually becomes a 0.80% increase in deposit rates. The missing 0.20% is not a rounding error. It is the combined effect of customer stickiness, pricing power, product design, competitive delay, and management action.
| Term | Plain-English meaning | IRRBB relevance |
|---|---|---|
| MR | Market rate, such as policy rate or benchmark curve movement | External shock |
| DR | Deposit or customer rate | Behavioral repricing outcome |
| β | Long-run pass-through rate | Final equilibrium response |
| λ₁ | Adjustment speed | How quickly the gap closes |
| λ₂ | Long-run anchor | Where the customer rate eventually lands |
Short Run vs Long Run
In the short run, deposits do not adjust instantly. Customers may be slow to notice, relationship managers may stagger repricing, and banks may hold rates flat to protect margins.
In the long run, market discipline pulls pricing toward equilibrium. Competitors reprice, customers search for yield, and the bank eventually has to decide whether margin protection is worth balance-sheet runoff.
This is where an ARDL / UECM framework becomes useful. Without making the model sound more mystical than it is, it separates two things that treasury and risk teams should not confuse:
- the speed of adjustment, captured by λ₁
- the long-run equilibrium anchor, captured through λ₂ and β
Try dragging λ₁ in the chart. A stronger negative λ₁ closes the gap faster. Then move λ₂ and watch the long-run pass-through level change.
Why It Matters
For profitability, slow pass-through can temporarily widen margins. If lending or asset yields move up while deposit costs stay flat, net interest income looks stronger, at least for a while.
For risk, the same stickiness can reverse direction. When rates fall, banks may not be able to cut customer deposit rates as quickly as benchmarks decline, especially if deposits are already near floors or customers are rate-sensitive. That creates margin squeeze.
For regulation, pass-through assumptions feed IRRBB measurement, stress testing, behavioral modelling, and capital adequacy discussions. A weak assumption here can quietly distort both NII sensitivity and EVE sensitivity.
The Nuance
Not all banks have the same β. A bank with strong franchise deposits, sticky operating accounts, and deep customer relationships may pass through less than a bank competing aggressively for rate-sensitive deposits.
β also varies across rate environments. Rising-rate pass-through is not always the mirror image of falling-rate pass-through. Floors, customer expectations, campaign pricing, liquidity pressure, and competitive intensity can all create asymmetry.
Peer benchmarks are useful, but they are not a substitute for measuring your own book. Product mix, depositor behavior, and pricing governance can make two banks with similar balance sheets behave very differently.
Practical Takeaway
Measurement drives strategy. If you know your pass-through rate, you can forecast NIM pressure earlier, challenge pricing assumptions, and stress-test whether management actions are realistic under different rate paths.
How well do you know your bank's pass-through rate? It may be the hidden metric behind your margin forecast.
If you are in risk, treasury, or ALM, this is worth stress-testing quarterly.