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.
Posts Tagged ‘economists’
Putable bond equivalents
Saturday, December 12th, 2009Professional managers
Saturday, November 14th, 2009Individuals whose job it is to manage these specialists, put in place control systems to shield the bank from unexpected losses and take action to position the bank to either take advantage of forecast long-term trends or to minimize earnings volatility whatever the change in interest or exchange rates. The economists and strategists are the people to talk with when you want a view on what is likely to happen in the world economy and to exchange rates over the next 12 months. These people are usually highly educated, with master’s degrees and doctorates very much the norm. The traders rely on these people for their insight into wider developments that may have an impact on the prices of instruments that they trade. It is an odd mix of street traders and cerebral academic types.