Cross-Sectional Modeling of Bank Deposits
22 Pages Posted: 8 Jan 2020
Date Written: December 17, 2019
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: Suggested Citation