Economic Benefits of Core Deposit Modeling

Deposit models that are developed from your in-house customer data typically provide many benefits that justify the extra effort of customized models. These benefits include:

1. Custom modeling of Core Deposits typically produces much longer durations than Regulatory estimates.

2. Incorporating these duration estimates into your balance sheet management often adds significantly to your ROA.

3. Incorporating these duration estimates into your balance sheet management also significantly reduces the economic risk to the market value of your Equity.

4. Accurate Core Deposit models are a prerequisite to accurate Funds Transfer Pricing for Retail Deposits.

5. Accurate Core Deposit modeling improves your ROA and risk profile can add significantly to the risk adjusted returns of your institution.

Managing the Profitability of Deposits through Core Deposit Modeling

Core Deposits should be one of the largest sources of profits in your institution and they represent a major Profit Engine. Consequently, they warrant careful study and optimization of the rates paid:

1. Often Core Deposits represent one-half or more of an institution’s funding.

2. Typically Core Deposits cost less than one-third the cost of large CD’s (before considering reserves and non-interest servicing costs).

3. Thus Core Deposits can readily contribute pre-tax profits equal to 2.00% or more of the deposit balances.

4. Consequently, they can also readily contribute 1.00% or more to your pre-tax ROA. (Assuming that they represent 50% of assets).

5. Our models will measure the sensitivity of balance levels to alternative pricing strategies.

Wall Street North’s Core Deposit studies Deliverables

We construct statistically validated forecast models based on your own historical data. Our proprietary methodology is more effective in measuring interest rate sensitivities and regional pricing behavior than the most commonly practiced alternatives. Our studies will produce:

1. Equations to estimate the run-off behavior of each deposit category (typically Personal and Business Checking, Savings, NOW and MMDA).

2. Equations to estimate regional deposit pricing for each interest bearing account category.

3. Our deliverables also include unique cash flow forecast worksheets that calculate the NPVs, Durations and Convexities of each deposit category in addition to calculating Funds Transfer Pricing. WSN’s proprietary worksheets can also be used to calculate the sensitivities of these risk measures to changes in assumptions.

Contact Us

We are confident that we can assist you with any core deposit modeling project. Please contact Steve Gordon, Managing Director (203) 569-5005 to find out more about our capabilities.