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Modeling Maximum Retail Deposit Rates
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Orientador(es)
Resumo(s)
Historically, the majority of commercial banks have employed a pricing strategy for
deposit rates that revolves around analysing the rates offered by their competitors. Such
analysis is utilized as a standard to inform and adjust their own deposit rate offerings.
The existing academic literature reveals a significant deficiency in the development of
pricing models for deposits. While certain authors have contributed with insights into es
sential elements that ought to be taken into account when formulating such models, they
have not proposed a practical model suitable for implementation within banking institutions.
Therefore, this thesis seeks to take a step forward on deposit pricing models.
The first step towards reaching such a model is, naturally, to understand the maximum
rate- or ceiling rate- that can’t be exceeded whenever the bank is to engage in a deposit
operation. This rate should be understood as the break-even rate, beyond which the deposit
transaction becomes unprofitable for the bank. So, this thesis will present a methodology
that banks can apply in order to compute this ceiling rate, for retail deposits, at any moment.
It is essential to adjust the ceiling rate based on the liquidity circumstances faced by
banks. In scenarios characterized by low liquidity, banks tend to increase their deposit
rates, viewing deposits as a cost-effective source of liquidity. In contrast, during periods
of high liquidity, usually accompanied by a low loan-to-deposit ratio, banks may find it
challenging, in part due to their risk appetite, to deploy their excess liquidity into lending
activities. Consequently, this often results in a decrease in deposit rates, as the need to
secure further funding diminishes.
The objective of this thesis is to develop a model for ceiling rates under conditions of
varying liquidity, addressing both high and low liquidity situations. Additionally, in the
context of high liquidity, a supplementary methodology will be introduced that attempts to
employ stochastic calculus to formulate an explicit equation for determining ceiling rates,
using only the deposit amount and maturity as the necessary inputs.
Descrição
Master Mathematical Finance
Palavras-chave
Retail Bank Deposits Pricing Model Stochastic Calculus Nelson-Siegel Model CDS Senior Debt coupon estimation
Contexto Educativo
Citação
Santos, Guilherme Alexandre Silva (2024). “Modeling Maximum Retail Deposit Rates”. Dissertação de Mestrado. Universidade de Lisboa. Instituto Superior de Economia e Gestão
Editora
Instituto Superior de Economia e Gestão