Deposit Stress Testing

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Regulatory stress testing is forcing banks to model every aspect of their businesses against economic drivers. In this presentation, we consider the problem of stress testing the deposit book through a case study of applying models at the industry level and examining the importance of macroeconomic variables in combination with internal strategic drivers in the modeling and stress testing process. Connect with the author, Tony Hughes: http://www.linkedin.com/in/hughesaw

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Deposit Stress Testing

  1. 1. Stress-Testing DepositsTONY HUGHES, SENIOR DIRECTOR
  2. 2. 22Credit Research& RiskMeasurementStructuredAnalytics& ValuationEnterprise RiskSolutionsOutsourcingSolutionsTraining &CertificationEconomic &ConsumerCredit AnalyticsOur Integrated Capabilities Fall Into Five Areas ofExpertise That Address Specific Needs
  3. 3. 33Access essential expertise on the economic and consumer credit trends that impact yourbusiness and investmentsEconomic & Consumer Credit AnalyticsEconomic,Consumer Credit,and Financial DataForecasts withAlternativeScenariosEconomic ResearchConsumer CreditAnalyticsRisk Management, Strategic Planning, Business and Investment Decisions
  4. 4. 44Assets LiabilitiesMacroeconomic Scenarios &Management StrategyVisualizing PPNRRetail DepositsC&ICommercialDepositsAutoRevenueExpensesOther LiabilitiesMortgageCreditCardStudentLoanLarge CapCREMiddleMarketSmallBusinessRetailDepositsExpensesExpensesExpensesRevenueRevenueRevenueRevenueRevenueRevenueRevenueExpensesExpensesExpensesExpensesEmployeesFixedAssetsRevenueRevenueExpensesExpensesExpensesExpenses
  5. 5. 55» Consider industry level trends and forces.» Data are readily available at this level (from the FDIC), covering mostaspects of deposit behavior.» Micro behavior is very complex–branch concentrations and service pricingare very important.» Macro view allows us to ignore these features and focus on the effect of thescenarios.» With industry stress projections in hand, we can focus on how an individualbank interacts with the industry in terms of market share.Toward a Stress-Testing Model of Deposits
  6. 6. 66» We take aggregate data and use it to stress-test the industry’s depositportfolio.» The model used is structural, considering inter-relations between bankingindicators. The broader macroeconomy is assumed to be exogenous.» We use the models and apply the Fed baseline, adverse and severelyadverse scenarios.» Remember that the adverse and severely adverse scenarios differ in natureas well as magnitude.» The models are quite big–we want to identify nuanced responses to differentscenarios.» We use dummied interactions to cope with the Fed’s recent extraordinarymonetary policies.» Adverse scenario is not observed in the domain of the data.Toward a Stress-Testing Model of Deposits
  7. 7. 7713579111300 01 02 03 04 05 06 07 08 09 10 11 12Deposit Growth Slows, With a Lag, in RecessionsTotal deposits, commercial banks, % change yr agoSources: FDIC, Moody’s Analytics
  8. 8. 8834567891011121300 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15Fed baselineFed adverseFed severely adverseDeposits Jump Under Alternatives, Then FlatTotal deposits, commercial banks, $ trilSources: FDIC, Moody’s Analytics
  9. 9. 993456789101100 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15Fed baselineFed adverseFed severely adverseDomestic Accounts Drive Total Deposit BehaviorDeposits held in domestic accounts, commercial banks, $ trilSources: FDIC, Moody’s Analytics
  10. 10. 10100.50.70.91.11.31.51.71.92.12.300 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15Fed baselineFed adverseFed severely adverseForeign Accounts Recover After StagnationDeposits held in foreign accounts, commercial banks, $ trilSources: FDIC, Moody’s Analytics
  11. 11. 11112345678900 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15Fed baselineFed adverseFed severely adversePositive Interest Rates Attract DepositorsDeposits in interest-bearing accounts, commercial banks, $ trilSources: FDIC, Moody’s Analytics
  12. 12. 12120.51.01.52.02.53.000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15Fed baselineFed adverseFed severely adverseNon-interest Normalizes Slowly Under S. AdverseDeposits in non-interest-bearing accounts, commercial banks, $ trilSources: FDIC, Moody’s Analytics
  13. 13. 1313234567891000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15Fed baselineFed adverseFed severely adverseDownside Events Depress Investment AccountsDeposits in non-transaction accounts, commercial banks, $ trilSources: FDIC, Moody’s Analytics
  14. 14. 14140.40.60.81.01.21.41.61.800 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15Fed baselineFed adverseFed severely adverseSavings Accounts Normalize After Strong GrowthDeposits in savings accounts, commercial banks, $ trilSources: FDIC, Moody’s Analytics
  15. 15. 15151.01.52.02.53.03.54.000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15Fed baselineFed adverseFed severely adverseTime Deposits Recover on Steeper Yield CurveDeposits held in term/time accounts, commercial banks, $ trilSources: FDIC, Moody’s Analytics
  16. 16. 16160.150.200.250.300.350.400.450.500.550.6000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15Fed baselineFed adverseFed severely adverseGovernment Accounts Lower Under AlternativesDeposits held by domestic governments, commercial banks, $ trilSources: FDIC, Moody’s Analytics
  17. 17. 1717» Macro data for deposits exists at a state level, but only for total deposits andnumber of branches.» Expect a state-based paper in coming days or weeks.» Combining these with the results presented here should allow for regionaldeposit forecasts and stress scenarios.» Applying to individual banks involves using bank-specific data. Modelsshould reflect changes in management actions, price structures, and branchpositioning.» Individual banks with atypical characteristics may exhibit trends that differfrom the overall industry, though industry performance is still highly relevant.» Once deposit forecasts are made, projections of interest and non-interestexpenses and revenues can be produced.Conclusion and Future Work
  18. 18. www.economy.comUnited States121 North Walnut StreetSuite 500West Chester PA 19380+1.610.235.5299AustraliaLevel 101 OConnell StreetSydney, NSW, 2000Australia+61.2.9270.8111United KingdomOne Canada SquareCanary WharfLondon E14 5FA+44.20.7772.5454PragueWashingtonova 17110 00 Prague 1Czech Republic+420.22.422.2929
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