Here’s a quick article that highlights why you should model your CD portfolios with some sort of early withdrawal function.
How to Make Sure Your Liability Duration is Real < CenterState Bank Blog
..Many banks have their certificates of deposits modeled on their asset-liability systems without optionality. That is, they treat the final maturity as gospel with little weight given towards repayment. This could be a mistake… In a rising rate environment, banks are exposed to a market loss in the form of opportunity cost should the investor redeem early. Of course, the early withdrawal penalty offsets some of this risk, but many banks have little or no protection in this department.
CenterState Bank – Correspondent Division – Blog: February 5, 2014
The article makes several good points. The most important being…your A/L model should handle this kind of optionality.
Fortunately for our A/L BENCHMARKS model customers we are modeling early withdrawals. We use a base-case 1% EWR. This EWR or “Early Withdrawal Rate” is akin to the prepayment CPR % we use on the loan side. The difference is that it behaves just the opposite of CPR when we run the interest rate stress-test. The EWR slows down as rates fall, and speeds-up as rates rise.
Shown below is a clip from our documentation. For example if a bank is using the default base assumption of 1% EWR, then when we run the +300bp stress-test the model will change the early withdrawal rate to 13.9%. If a bank feels their penalties are stiff enough this change can be adjusted down (to reflect that the customers are less likely to take their money because of the greater penalty.)