Cross-Sectional Modeling of Bank Deposits

22 Pages Posted: 8 Jan 2020

See all articles by Sofia Costa

Sofia Costa

New University of Lisbon

Marta Faias

University of Lisbon - Faculty of Sciences

Pedro Júdice

Montepio Bank; Business Research Unit, Instituto Superior de Ciencias do Trabalho e da Empresa (ISCTE)

Pedro Mota

New University of Lisbon

Date Written: December 17, 2019

Abstract

Studying the dynamics of deposits is important for three reasons: first, it serves as an important component of liquidity stress testing; second, it is crucial to asset-liability management exercises and the allocation between liquid and illiquid assets; third, it is the support for a liquidity at risk (LaR) methodology.

Current models are based on AR(1) processes that often underestimate liquidity risk. Thus a bank relying on those models may face failure in an event of crisis. We propose a novel approach for modeling deposits, using panel data and a momentum term. The model enables the simulation of a variety of deposit trajectories, including episodes of financial distress, showing much higher drawdowns and realistic liquidity at risk estimates, as well as density plots that present a wide range of possible values, corresponding to booms and financial crises.

Therefore, this methodology is more suitable for liquidity management at banks, as well as for conducting liquidity stress tests.

Keywords: Bank Deposits, Liquidity, Momentum, Panel Data

JEL Classification: C01, G21, G32

Suggested Citation

Costa, Sofia and Faias, Marta and Júdice, Pedro and Mota, Pedro, Cross-Sectional Modeling of Bank Deposits (December 17, 2019). Available at SSRN: https://ssrn.com/abstract=3505393 or http://dx.doi.org/10.2139/ssrn.3505393

Sofia Costa

New University of Lisbon

Lisbon, 1099-085
Portugal

Marta Faias

University of Lisbon - Faculty of Sciences ( email )

Campo Grande
Lisboa, 1749-016
Portugal

Pedro Júdice (Contact Author)

Montepio Bank ( email )

Rua do Carmo, No. 42, 6.andar
Lisbon, 1200-094
Portugal

Business Research Unit, Instituto Superior de Ciencias do Trabalho e da Empresa (ISCTE) ( email )

Complexo Indeg/Iscte
Av. Professor Anibal Bettencourt
Lisboa, 1600-189
Portugal

Pedro Mota

New University of Lisbon

Lisbon, 1099-085
Portugal

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