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Net Economic Value: What is a Reasonable Value for Non-Maturity Deposits?

January 16, 2014

When approaching net economic value (NEV) analyses, the issue of valuing non-maturity deposits has been a point of contention for practitioners and regulators alike.  The focus traditionally is on the question:  What is the final maturity of a deposit that contractually never matures?  In the end, the nature of the question of maturities needs to change.  Determining cash flows is simply a means to the end of valuation.  While it could be very defendable that the final maturity of a regular share account is in excess of 10 years, would the market really pay the resulting premium?

If the objective is to understand economic value, the true focus of the question should be:  What is a reasonable value for my non-maturity deposits?
Rather than relying on maturity studies to dictate the results, consider the following:
  • What kind of premium would you pay for non-maturity deposits today?  (Keep in mind many institutions are still trying to figure out what to do with excess funds.)
  • What kind of premiums have been paid on non-maturity deposits in today’s low-rate environment in actual mergers?
  • What about premiums on non-maturity deposits when rates were at their last peak back in the summer of 2007?
Based on this kind of empirical evidence, the above considerations could serve as a better proxy for value than maturity assumptions.  Furthermore, stress testing could be done by shocking historical premiums, asking the question:  What if the market doesn’t pay as much of a premium going forward?
If you utilize NEV analysis as part of your asset/liability management (A/LM) process, do a “gut check” on the resulting value of your non-maturity deposits.  If you wouldn’t pay the resulting premium, chances are most others in the market wouldn’t either.  Regardless of what an academically sophisticated analysis dictates a final maturity to be, decision makers must rise above the methodology and traditional focus of assumptions and ask themselves if the resulting value makes sense.

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