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Comments

Mayank Jha

Hi,

How would you compute the 'core deposit repricing factor' in an enviroment where the bank changes its administered rates differently every time? Also, the change in the rates may depend on its direction. Banks may lower as much as the market but may not raise as much as the market.
How do we compute the 'core deposit repricing factor' in such situations?

Brad Olson

>> …bank changes its administered rates differently every time?

There is no easy answer here. It can be different every time because banks’ often change their core rates for reasons other than changes in the market rate environment. Competition, growth strategies, and other economic conditions can have very strong influences on pricing.

>> the change in rate my depend on [the direction of market change]…

Absolutely, which is why we recommend clients establish a beta for rates-up and a different beta for rates-down.

>> How do we compute a factor…?

The short answer is that you can’t. There isn’t any “standard calculation” for coming up with the repricing factor (or beta). If there were, we’d be using it. The core factors used by our modeling clients are usually somewhere along this evolutionary scale:

1) use our defaults which are: +/-0% for NOW & Other Savings, and +/-100% for Money Markets.

2) use senior bank management’s SWAG. Usually the resulting beta here allows core rates to change only enough to keep the bank within its policy limits. (I’m not joking, that’s the explanation I’ve gotten from more CFO’s than you would think).

3) use betas derived from the average change in core rates given actual market rate changes. In other words compute the beta by looking at actual historical changes. This may sound good, but it ignores the fact that bank’s change rates for other significant reasons too.

4) some combination of #2 & #3 above. This is the best. It’s even better if the bank have this discussion at every ALCO meeting. It doesn’t have to be a long discussion, but just enough to document it as part of the meeting minutes. You want to discuss the current beta you are using to be sure it doesn’t become stale or outdated.

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