Thanks to everyone from Colombia and Dominican Republic who attended my deposit modeling workshop in Bogota. In addition to experiencing higher and more volatile interest rates relative to banks in the US and Europe, the introduction of non-bank financial intermediaries and on-line banking platforms which facilitate costless balance transfers between institutions are challenging the historical stickiness of deposits in these countries. As a result, the assessment of interest rate risk, liquidity risk and product profitability must be revised to acknowledge the decreasing value of NMDs.
In the workshop, we discussed numerous risk and profitability measures which require explicit behavioral assumptions around NMDs. I then presented my approach for quantifying deposit behaviors which ensures that key risk and profitability management measures are fed with a common set of behavioral assumptions; this is accomplished by an FTP rate calculator which is integrated directly into the behavioral model. FTP rates are computed using the same re-pricing and liquidity cash flows which are used to feed the ALM model, and in addition to providing historical and pro forma FTP rates for each product, any behavioral changes which result in model re-calibration produce a logically consistent change in FTP rates and FTP rate dynamics.
In the workshop, we also discussed several high-profile banks in the US whose earnings have been punished by rising rates because of their over-reliance on high-rate, volatile money market accounts. These institutions evidence a complete failure to understand the relative value of different types of deposit products and almost certainly a failure to acknowledge how IRR and LR contribute to overall corporate earnings. In short, above-market asset growth is not a viable strategy for long-term, stable earnings growth. Almost certainly these firms do not utilize FTP to determine earnings attributions. When deposits are simply assumed to be profitable, a painful reckoning is inevitable.
For more information about our workshops, see www.davidgreenadvisors.com/workshops.
The next NMD workshop will be held in New York early next year. Check back soon for details.