Estimating the Interest Rate Sensitivity of Liquid Retail Deposit Values

Posted: 20 Dec 1998

See all articles by James M. O'Brien

James M. O'Brien

Board of Governors of the Federal Reserve System - Trading Risk Analysis Section

Athanasios Orphanides

Massachusetts Institute of Technology (MIT) - Sloan School of Management

David H. Small

Federal Reserve Board - Monetary Studies Section

Date Written: June 1994

Abstract

One of the most difficult issues in the measurement of bank interest rate risk is the interest rate risk of liquid retail deposits. In this study, estimates are developed for the interest rate sensitivity of the value of interest-bearing checkable deposits (OCDs) and savings deposits defined to include MMDAs and other savings accounts. These interest rate sensitivities are measured by the percentage change in the value of the deposit liability due to a change in market interest rates which, for a permant rate shock and hence parallel yield curve shift, represent the deposit's "duration." The value of the deposit liability is equal to the deposit balance net of the present value of economic profits earned on the liability. Because deposit rates adjust upward to market rates more slowly than downward, the interest rate sensitivity of the economic profits from liquid deposit accounts tends to be greater when deposit rates are rising than when they are falling. As a consequence, durations tend to be relatively large when deposit rates are moving up and small when deposit rates are moving down. Durations are estimated for permanent shocks to market rates for aggregated deposit categories and for individual banks. The consequences for deposit interest rate sensitivities are further examined for stochastic, mean-reverting market rates and nonparellel yield curve shifts.

JEL Classification: G18, G21

Suggested Citation

O'Brien, James Michael and Orphanides, Athanasios and Small, David H., Estimating the Interest Rate Sensitivity of Liquid Retail Deposit Values (June 1994 ). Available at SSRN: https://ssrn.com/abstract=5602

James Michael O'Brien (Contact Author)

Board of Governors of the Federal Reserve System - Trading Risk Analysis Section ( email )

Washington, DC 20551
United States

Athanasios Orphanides

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=54058

David H. Small

Federal Reserve Board - Monetary Studies Section ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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