Deposit Study

The Most Powerful Inputs to Your IRR Model

Your bank specific assumptions (primarily your deposit study decay and beta) form the most powerful inputs to your IRR model.  Once you master these key assumptions you will improve the accuracy of your entire interest rate risk and ALCO process.

Why?  Your nonmaturity deposit accounts (NMDAs) are not like any other items on your balance sheet.  They have neither a contractual maturity date nor a stated interest rate.  That means to accurately model their cash flows you must be able to appropriately model both their expected average life and interest rate characteristics.

Not only must you accurately model these factors, but your modeled assumptions must stand up to regulatory scrutiny.  That means documenting your data inputs, calculation process and outputs to meet exam standards.

Practically speaking, your examiner can always dispute your opinions, but can't really question statistical significance.  That means we must build our deposit study on statistically significant testing, but we'll temper it with management inputs.

What's your next step?