An unobvious dynamics of rolled over time banking deposits under a shift in depositors’ preferences: whether a decrease of weighted average maturity of deposits is indeed an early warning liquidity indicator?

Voloshyn, Ihor (2014): An unobvious dynamics of rolled over time banking deposits under a shift in depositors’ preferences: whether a decrease of weighted average maturity of deposits is indeed an early warning liquidity indicator?

Abstract

A continuous-time deterministic model for analytical simulation of an impact of changes in credit turnover, term to maturity structure and rollover rate on balances of time banking deposits, i.e., preferences of depositors, is developed. The model allows taking into account an attraction of new deposits and rolling over the maturing deposits. It is shown some deceptive and unobvious regimes of depositing when the deposit balances increase in the beginning and then fall down and vice versa. It is presented an equilibrium money conservation law for banks. Besides, the examples of calculations of continuous-time deposit dynamics are given. It is shown that such a Basel early warning liquidity indicator as a decrease of weighted average maturity of liabilities is necessary but not sufficient. It is proposed that to make more accurate ALM decisions and avoid serious managerial errors a bank should rely not only on a change in deposit balances but on changes in turnovers, term structure of deposits and rollover rate. At long-term lending, a bank should orient on minimal deposit balances in a short-term period and long-term, steady state deposit balances, employing for this an equilibrium money conservation law.

• Item Type: MPRA Paper
• Language: English
• Keywords: bank, time deposit, retail, balance, credit turnover, debit turnover, term to maturity, rollover rate, dynamics, money conservation law, liquidity, early warning indicator, Basel iii, asset liability management (ALM), Volterra integral equation, Laplace transform
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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