Handbook of Asset and Liability Management: From models to optimal return strategies

11

Deposits and Savings

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11.1 DEPOSITS, MONETARY AGGREGATES, MONEY SUPPLY AND MACROECONOMICS

Deposits and savings represent a large part of the bank balance sheet. Nevertheless, their modelling and their hedging have never been as easily analysed as other products.

In this chapter, the usual way those deposits are analysed is explained and discussed. We propose a modern modelling approach providing a perfect hedging of these deposits.

In many western countries, deposits take different forms:

• demand deposit accounts (DDA);
• checking accounts;
• money market savings;
• savings;
• term deposits.

The market is different from one country to the other but some characteristics are common in many places.

The demand deposit accounts are ultra liquid deposits. Clients may withdraw their cash at any time without any penalty. The number of transactions (transfers, checks, etc.) allowed each month is not limited. Remuneration is usually equal to zero. The bank may ask for a monthly charge but not necessarily.

Checking accounts are different from demand deposits in that the client usually gets a low remuneration rate with a monthly fee.

Savings are common accounts where the client has the ability to withdraw his cash at any time but the number of transfers is limited within a month. There is no cheque book associated with this account. Remuneration is higher than for checking accounts. In many countries, a public entity ...