Understanding the attributes of core deposits is key in forming an overall liquidity plan and a contingency funding plan, as well as in accurately modeling assumptions about loan growth, writes Bill Patterson in a recent article for BankDirector.com. He offers the following insights on the matter:
- Institutions are finding that customers are willing to buy longer term CDs in exchange for yield in the wake of the 10-year interest rate trough from which the economy is emerging. As a result of this higher rate environment, it is difficult to predict how long deposits will remain on the books and what the cost will be to maintain them.
- Decay is the measure of deposit attrition, or how long deposit accounts will likely remain open. Historically, the normal range for decay is 24 months for sensitive deposits and 84 months for static accounts—numbers supplied by market averages, vendors, the Office of Thrift Supervision, and management estimates. Other forms of deposit studies, however, are gaining popularity.
- The higher degree of precision for these non-deposit modeling assumptions helps reduce simulation risk. Removing the assumptions or making material changes to them puts financial institutions in danger of approaching or exceeding prudent risk limits.
- Core deposit assumptions are an important variable in the modelling results. While a detailed core deposit study is both involved and costly, it will produce the most accurate assumptions.
For more information, read the article in full at BankDirector.com.