As asset liability managers, one of the biggest decisions we can make concerns the repricing and average life of our non-maturity deposits. Generally, we typically start with the FDICIA 305 non-maturity average life guidelines. While we have previously discussed this topic, a quick refresher might be in order.
Recently, I heard from a banker who correctly suggested that bank specific assumptions would be preferable. I agree with this point of view 100%. Remember, the FDICIA guidelines are only that... Guidelines. In the event that we have bank specific knowledge of non-maturity deposit behavior that differs, we should definitely use the bank specific information. However, let's look at the practical alternatives.
- Commission a Formal Deposit Study. Perhaps the best alternative is to commission a formal deposit study, either internally or using an outside consultant. Unfortunately, many banks don't have the resources in-house to fully perform such a study, and the cost of an external consultant can be significant, especially to a smaller community back.
- Perform an Informal In-House Study. Another good alternative is to convene a group of bank executives and model non-maturity deposit behavior based upon the knowledge and experience of top management. While this is perhaps the most accurate method, it suffers from a lack of formal backup to support the conclusions.
- Use Contractual Maturities. One method that cannot be argued against, from a technical standpoint, is using contractual maturities. After all, if the depositor of your non-maturity deposits can withdraw the money without notice, clearly you can justify placing these deposits in the overnight bucket. Unfortunately, the problem with this scenario is that the deposit behavior really never matches the contractual maturity. The net impact of this method is simply to mask the degree of asset sensitivity of the bank.
So where does this leave us? Contractual maturities have legal support, but result in inaccurate asset liability information. An informal in-house study might give us the most accurate asset liability behavior, but often lacks the supporting documentation to back up the allocations. A formal deposit study probably represents the most accurate, and best supported outcome. The only downside here is that a study of this type can be costly in terms of resources.
As with so much in banking, and in particular with respect to asset liability modeling and management, we are faced with a trade-off. More accurate and better supported information is more costly. As good stewards, we are charged with obtaining the biggest bang for our banking buck. It is in this context, that we generally start by suggesting the FDICIA 305 non-maturity guidelines. But we certainly don't want to leave you with the impression that should you have more accurate information that you should not use it.
Perhaps your bank has the in-house expertise and resources needed to perform a formal deposit study. Or perhaps you can combine your in-house information with an external consultants analytics. In this way perhaps you can defray the cost using some sweat equity.
Photo provided by Mykl Roventine.