Crediting rate definitions for indeterminate maturity deposits (a.k.a. core deposits) are an often contentious issue in FTP applications. Treasury looks at the short terms implied in the contract while Retail points to the long term like behaviors actually observed. In most cases, there is no resolution of the conflict because common ground is not defined. But how to bring Treasury and Retail together on this issue and make FTP applications work better?
To define indeterminate maturity deposit crediting rates, quantify history
The historic record of depositor behavior paints a detailed picture of their revealed preferences relating to supply and retention. Specifically, history tells exactly how depositors have chosen to react (or not react) to changes in financial influences such as rates and rate spreads over time. Your institution's rate paid history does the same for your repricing. History is thus the key to defining crediting rate terms for indeterminate maturity deposits.
Identifying influences in the historic record that are significant influences on past behavior produces models that can forecast future behavior. These models define for financial managers the types of deposit behaviors that can be expected across prescribed scenarios. With this information, what once were uncertain FTP related inputs are now capable of being defined effectively.
FTP inputs that can be quantified in the historic record relate to short term crediting rate determinants, such as repricing and supply sensitivity to changes in interest rates/repricing, and longer term factors such as period specific run off values and truncation points. Also readable in the historic record are patterns of seasonal supply behaviors, surge balances, and related additional short term adjustment factors. Specific micro-level account, product, and depositor attributes can also be identified if desired. These support advanced levels of crediting.
Quantifying historic indeterminate maturity deposit behaviors is not a simple task, however. There are a large number of moving pieces in crediting rate definitions that need to be comprehensively quantified, for example the sensitivity of supply to rate changes and spreads, repricing amounts and lag effects, retention/run off of balances over time and their sensitivity to finance influences, seasonality, surge balances, and other adjustment factors.
The bottom line: A high powered and advanced statistical methodology is required to quantify all of the revealed preference information in the historic record of your institution's indeterminate maturity deposits. Simple types of approaches won't work because they do not capture all of the moving pieces, thus handicapping you in your efforts to comprehensively define all FTP crediting dimensions for indeterminate maturity deposits.
The MPS solution for FTP deposit crediting rate inputs
FTP related balance sheet behaviors are comprehensively quantified in institution-specific applications of the MPS Advanced Assessment Methodology©. Forecast outputs from the equation systems estimated using this approach answer all FTP crediting rate questions with respect to indeterminate maturity deposits.
The MPS Advanced Assessment Methodology© in FTP related behavior applications produces:
- High precision quantification of historic behaviors that explain the drivers of past trends
- Institution specific forecasts that define all elements of Indeterminate maturity deposit crediting
- Indeterminate maturity deposit FTP crediting rate inputs that are defensible to Treasury and Retail
The MPS Advanced Assessment Methodology© is used as the analytical basis for the MPS Indeterminate Maturity Deposit Analysis service. Forecasts obtained from uses of the methodology are also used in MPS indeterminate maturity deposit index reports.