Banks have to differentiate between legal and economic duration. Most banks will allow early withdrawal of time deposits but impose a penalty charge. Many short-term deposits in the form of demand and savings deposits have legal terms that are much shorter than their economic term. Many savings type deposits offer a fixed rate of return (or only change the rate infrequently). In the event of a modest increase in interest rates most depositors will leave these funds in their savings accounts. As rates rise, however, there is a shift away from demand and savings type deposits into term deposits offering higher rates. This alters the economic duration of such liabilities.
Tags: assets, crisis, economists, liability