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Non-maturity deposits with a fidelity premium


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  • Marie-Paule Laurent
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    Non-maturity deposits are a major source of funds for traditional banks. The deposit valuation model described by Jarrow and van Deventer (1998) assumes a short-term liquidity option and a single remuneration rate. We extend the traditional valuation model to the case where, as in the Benelux, the deposits are remunerated first on the current balance (at the base rate) and where an additional premium rewards the deposits that have remained on the account for a certain period (at the fidelity premium rate). We show the existence of an additional term in the valuation formula, the premium complement, allowing the total remuneration rate to be higher than the short-term interest rate and still yield positive net present value. The premium complement depends positively on the base deposit spread during the holding period and negatively on the proportion of stable deposits. Hence, the model explains why a rational bank may offer a fidelity premium higher than the deposit spread. The 11-year data provided by a European regional bank are used to empirically compare the valuation models. The results show that the proportion of stable deposits plays an important role in the valuation and must be taken into account accurately. The effect of changes in the remuneration policy on the optimal proportion of stable deposits is also analysed.

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    Bibliographic Info

    Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 04-016.RS.

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    Length: 28 p.
    Date of creation: Apr 2004
    Date of revision:
    Publication status: Published by: Université Libre de Bruxelles, Solvay Business School, Centre Emile Bernheim (CEB)
    Handle: RePEc:sol:wpaper:04-016

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    Keywords: Non-maturity deposit; fidelity premium; bankink.;

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    1. James M. O'Brien, 2000. "Estimating the value and interest rate risk of interest-bearing transactions deposits," Finance and Economics Discussion Series 2000-53, Board of Governors of the Federal Reserve System (U.S.).
    2. Frank de Jong & Jacco Wielhouwer, 2001. "The Valuation and Hedging of Variable Rate Savings Account," Tinbergen Institute Discussion Papers 01-112/2, Tinbergen Institute.
    3. Charles Kahn & George Pennacchi & Ben Sopranzetti, 1996. "Bank deposit rate clustering: theory and empirical evidence," Working Paper 9604, Federal Reserve Bank of Cleveland.
    4. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
    5. Hutchison, David E. & Pennacchi, George G., 1996. "Measuring Rents and Interest Rate Risk in Imperfect Financial Markets: The Case of Retail Bank Deposits," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(03), pages 399-417, September.
    6. James A. Berkovec & John J. Mingo & Xuechun Zhang, 1997. "Premiums in private versus public bank branch sales," Finance and Economics Discussion Series 1997-33, Board of Governors of the Federal Reserve System (U.S.).
    7. James O'Brien & Athanasios Orphanides & David Small, 1994. "Estimating the interest rate sensitivity of liquid retail deposit values," Finance and Economics Discussion Series 94-15, Board of Governors of the Federal Reserve System (U.S.).
    8. Jong, F.C.J.M. de & Wielhouwer, J.L., 2001. "The Valuation and Hedging of Variable Rate Savings Accounts," Open Access publications from Tilburg University urn:nbn:nl:ui:12-88562, Tilburg University.
    9. Kalkbrener, Michael & Willing, Jan, 2004. "Risk management of non-maturing liabilities," Journal of Banking & Finance, Elsevier, vol. 28(7), pages 1547-1568, July.
    10. Jarrow, Robert A. & van Deventer, Donald R., 1998. "The arbitrage-free valuation and hedging of demand deposits and credit card loans," Journal of Banking & Finance, Elsevier, vol. 22(3), pages 249-272, March.
    11. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-45, September.
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    Cited by:
    1. Nyström, Kaj, 2008. "On deposit volumes and the valuation of non-maturing liabilities," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 709-756, March.


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