Abstract

Consequent to the 2023 deposit stress scenarios, banks have improved their liquidity buffers, stress assumptions, and reported Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) well above the minimum regulatory requirements. The headline deposit levels for many banks seem to be stable.

This working paper highlights a new structural risk that has emerged: the "behavioral drift" of core funding in a high-velocity digital world.

This paper is developed from a composite case study based on observable trends in the larger Asia Pacific banking industry. The paper examines the experience of SME and corporate operating balances as actively managed liquidity pools rather than passive sources of funding. The paper shows how the development of treasury automation, API connectivity, and yield transparency has made deposits more sensitive to interest rates, mobile, and short-term.

The paper shows that while deposits can remain stable, there is a shift in the customer behaviour.  It is impacting the cost of funds and the lending portfolio of the banks.  For example, the decrease in duration and the substitution of funds into the wholesale markets produce an increase in marginal funding costs, thereby distorting the assumptions of internal transfer pricing.

The paper proposed a framework for behavioral stability to re-evaluate “core deposits” based on observed balance behavior rather than product names or assumed decay rates. The paper concludes by describing three metrics for boards and treasury groups to assess funding quality and drift in assumptions related to loan pricing, risk appetite, and capital allocation in a digitally connected banking environment.

Further work on Decision Engineering™, the Decision Integrity Chain™ and the Fiduciary Gap™ is available at lumathink.com.

Creative Commons License

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 License.

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