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Back to basics:
non-determinant deposits
With the strong trend in banking of mark-tomarket risk management, bankers face the
difficult task of calculating the market value for
non-maturity deposits and credit card loans.
Suresh Sankaran, vice-president and director
at strategic consulting services firm Fiserv IPSSendero, sheds some light on the matter
26
While this simple approach allows the practical distribution of nondeterminant maturity deposits into liquidity and sensitivity gap reports, it
does not allow for the changing of cashflows based on changing interest
rates or macro factor variables. Therefore, this approach does not provide
us with alternative economic value or duration numbers for such accounts,
which constitute a significant portion of a retail banks balance sheet. The
only way to calculate these is to generate a repayment schedule for all
deposits, taking into consideration the behaviour of the customer and the
impact of administered rates.
In todays world of complex derivatives and incomprehensible ratings,
we need to move back to a structure of hedging on-balance sheet asset
exposures with simple on-balance sheet liability exposures, and use the
liability-modelling framework to provide a structural hedge for the asset
exposures.
In the case of non-determinant maturity deposits, the value of the
deposit could also be the premium that a third party is willing to pay above
the face value of the deposits to assume ownership of a banks deposit franchise. In this case, value means the net present value benefit of owning the
deposit franchise or the value of cash provided by depositors less the present
value cost of the deposit franchise.
There is a good reason for looking at the franchise for valuation. The
pricing of non-determinant maturity deposits is exactly the same for any
new customer as it is for existing customers, since banks operate on the
Historical
balances
Jan 02
694,316
Feb 02
697,712
3,396
Mar 02
711,380
13,668
Apr 02
729,654
May 02
761,357
Jun 02
792,496
31,139
Jul 02
820,717
28,221
Aug 02
816,665
(4,052)
Sep 02
847,639
30,974
34
Oct 04
1,061,381
10
Oct 02
846,214
(1,425)
35
Nov 04
1,000,957
11
Nov 02
839,067
(7,147)
36
Dec 04
1,049,777
48,820
12
Dec 02
857,020
17,953
37
Jan 05
1,034,382
(15,395)
13
Jan 03
869,772
12,752
38
Feb 05
1,044,785
14
Feb 03
880,977
11,205
39
Mar 05
15
Mar 03
878,521
(2,456)
40
Apr 05
16
Apr 03
898,088
19,567
41
17
May 03
936,117
38,029
42
18
Jun 03
963,864
27,747
43
Jul 05
1,109,443
19
Jul 03
964,240
376
44
Aug 05
1,100,378
20
Aug 03
972,592
8,352
45
Sep 05
1,095,157
(5,221)
21
Sep 03
980,729
8,137
46
Oct 05
1,081,138
(14,019)
22
Oct 03
941,579
(39,150)
47
Nov 05
1,103,686
23
Nov 03
935,642
(5,937)
48
Dec 05
1,121,924
24
Dec 03
890,453
(45,189)
49
Jan 06
1,131,835
9,911
25
Jan 04
919,625
29,172
50
Feb 06
1,139,242
7,407
mortgageriskmagazine.com 05.2008
Month-tomonth delta
Period
Historical
balances
Month-tomonth delta
Period
Historical
balances
Month-tomonth delta
26
Feb 04
933,231
13,606
27
Mar 04
930,939
(2,292)
51
Mar 06
1,163,777
24,535
52
Apr 06
1,166,684
28
Apr 04
945,964
15,025
2,907
53
May 06
1,182,351
15,667
18,274
29
May 04
953,868
31,703
30
Jun 04
770,311
7,904
54
Jun 06
1,183,687
1,336
(183,557)
55
Jul 06
1,163,732
(19,955)
31
Jul 04
981,960
32
Aug 04
995,965
211,649
56
Aug 06
1,163,080
(652)
14,005
57
Sep 06
1,163,271
33
Sep 04
994,252
191
(1,713)
58
Oct 06
1,182,398
19,127
67,129
59
Nov 06
1,184,084
1,687
(60,424)
60
Dec 06
1,209,662
25,578
61
Jan 07
1,241,912
32,249
62
Feb 07
1,289,523
47,611
10,403
63
Mar 07
1,294,655
5,132
1,037,911
(6,874)
64
Apr 07
1,313,042
18,387
1,055,301
17,390
65
May 07
1,334,627
21,585
May 05
1,076,970
21,669
66
Jun 07
1,340,796
6,169
Jun 05
1,095,881
18,911
67
Jul 07
1,355,684
14,888
13,562
68
Aug 07
1,360,294
4,610
(9,065)
69
Sep 07
1,371,197
10,903
70
Oct 07
1,394,041
22,844
71
Nov 07
1,408,389
14,348
22,548
72
Dec 07
1,451,715
43,325
18,238
73
Jan 08
1,427,030
(24,685)
27
1,427,03?
1,336,67?
1,336,67
10,177
2,200,000
38,899
2,000,000
95%
1,800,000
1,600,000
3.771%
1,400,000
1,200,000
1,000,000
10,177
38,899
800,000
99%
600,000
(80,316)
5.628%
2002
2004
2006
2008
2010
2012
4. Forecast balances
28
Period
Forecast
Period
Forecast
Period
Forecast
74
Feb 08
1,437,206
94
Oct 09
1,640,738
114
Jul 11
1,844,269
75
Mar 08
1,447,383
95
Nov 09
1,650,914
115
Aug 11
1,854,446
76
Apr 08
1,457,559
96
Dec 09
1,661,091
116
Sep 11
1,864,623
77
May 08
1,467,736
97
Jan 10
1,671,268
117
Oct 11
1,874,799
78
Jun 08
1,477,913
98
Feb 10
1,681,444
118
Nov 11
1,884,976
79
Jul 08
1,488,089
99
Mar 10
1,691,621
119
Dec 11
1,895,152
80
Aug 08
1,498,266
100
Apr 10
1,701,797
120
Jan 12
1,905,329
81
Sep 08
1,508,442
101
May 10
1,711,974
121
Feb 12
1,915,505
82
Oct 08
1,518,619
102
Jun 10
1,722,150
122
Mar 12
1,925,682
83
Nov 08
1,528,795
103
Jul 10
1,732,327
123
Apr 12
1,935,859
84
Dec 08
1,538,972
104
Aug 10
1,742,504
124
May 12
1,946,035
85
Jan 09
1,549,149
105
Sep 10
1,752,680
125
Jun 12
1,956,212
86
Feb 09
1,559,325
106
Oct 10
1,762,857
126
Jul 12
1,966,388
87
Mar 09
1,569,502
107
Dec 10
1,773,033
127
Aug 12
1,976,565
88
Apr 09
1,579,678
108
Jan 11
1,783,210
128
Sep 12
1,986,742
89
May 09
1,589,855
109
Feb 11
1,793,387
129
Oct 12
1,996,918
90
Jun 09
1,600,032
110
Mar 11
1,803,563
130
Nov 12
2,007,095
91
Jul 09
1,610,208
111
Apr 11
1,813,740
131
Dec 12
2,017,271
92
Aug 09
1,620,385
112
May 11
1,823,916
132
Jan 13
2,027,448
93
Sep 09
1,630,561
113
Jun 11
1,834,093
133
Feb 13
2,037,624
2,200,000
Historical balances
Trends
Minimum balances
2,000,000
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
2002
2004
2006
2008
2010
2012
Summary
Core deposits are valuable to an institution due to the combination of
managements ability to exercise lagged, below market pricing and the customers willingness to accept those pricing differentials in exchange for
services and convenience. Given the strong profit allure contained in asset
mismatch strategies using core deposit leverage, an interest rate risk measurement process should include assessment of basis risk in the banks nonmaturity funding. In addition to presenting a historical approach to nondeterminant deposit maturity measurement, this article offers a solution to
the deposit duration debate that is faithful to the EVE methodology. Analysis that fails to address the basis risk in core liabilities may result in a distorted view of the balance sheets risk/reward trade-off. Basis risk information can yield guidance on prudent volume controls over asset-led mismatch
and options strategies. l
6. Minimum balance that remains with the bank into the modelling horizon
Period
Forecast
Minimum
Period
Forecast
Minimum
Period
Forecast
Minimum
74
Feb 08
1,437,206
1,346,714
94
Oct 09
1,640,738
1,226,050
114
Jul 11
1,844,269
1,264,835
75
Mar 08
1,447,383
1,319,407
95
Nov 09
1,650,914
1,226,468
115
Aug 11
1,854,446
1,267,988
76
Apr 08
1,457,559
1,300,822
96
Dec 09
1,661,091
1,227,105
116
Sep 11
1,864,623
1,271,224
77
May 08
1,467,736
1,286,751
97
Jan 10
1,671,268
1,227,947
117
Oct 11
1,874,799
1,274,541
78
Jun 08
1,477,913
1,275,565
98
Feb 10
1,681,444
1,228,982
118
Nov 11
1,884,976
1,277,934
79
Jul 08
1,488,089
1,266,429
99
Mar 10
1,691,621
1,230,198
119
Dec 11
1,895,152
1,281,403
80
Aug 08
1,498,266
1,258,845
100
Apr 10
1,701,797
1,231,585
120
Jan 12
1,905,329
1,284,944
81
Sep 08
1,508,442
1,252,491
101
May 10
1,711,974
1,233,133
121
Feb 12
1,915,505
1,288,556
82
Oct 08
1,518,619
1,247,142
102
Jun 10
1,722,150
1,234,834
122
Mar 12
1,925,682
1,292,235
83
Nov 08
1,528,795
1,242,633
103
Jul 10
1,732,327
1,236,680
123
Apr 12
1,935,859
1,295,981
84
Dec 08
1,538,972
1,238,843
104
Aug 10
1,742,504
1,238,663
124
May 12
1,946,035
1,299,790
85
Jan 09
1,549,149
1,235,674
105
Sep 10
1,752,680
1,240,778
125
Jun 12
1,956,212
1,303,662
86
Feb 09
1,559,325
1,233,050
106
Oct 10
1,762,857
1,243,018
126
Jul 12
1,966,388
1,307,594
87
Mar 09
1,569,502
1,230,910
107
Dec 10
1,773,033
1,245,377
127
Aug 12
1,976,565
1,311,585
88
Apr 09
1,579,678
1,229,203
108
Jan 11
1,783,210
1,247,850
128
Sep 12
1,986,742
1,315,632
89
May 09
1,589,855
1,227,885
109
Feb 11
1,793,387
1,250,432
129
Oct 12
1,996,918
1,319,735
90
Jun 09
1,600,032
1,226,922
110
Mar 11
1,803,563
1,253,119
130
Nov 12
2,007,095
1,323,892
91
Jul 09
1,610,208
1,226,281
111
Apr 11
1,813,740
1,255,907
131
Dec 12
2,017,271
1,328,102
92
Aug 09
1,620,385
1,225,938
112
May 11
1,823,916
1,258,792
132
Jan 13
2,027,448
1,332,363
93
Sep 09
1,630,561
1,225,867
113
Jun 11
1,834,093
1,261,769
133
Feb 13
2,037,624
1,336,673
mortgageriskmagazine.com 05.2008
29