Tag: Certificates of Deposits

How To Use “Specials” And Odd-Month CDs in Deposit Structuring

Better Deposit Pricing

It seems like something is getting lost in the tribal knowledge of deposit gathering. Certificate of deposit (CD) “specials” and the odd-month CD offering are a good example of this. As the legacy knowledge of deposit gathering is passed down from generation to generation of banker, some of the finer points of liability structuring are getting bastardized with some knowledge just plain forgotten about. In this article, we highlight how many banks are misusing CDs at the detriment of their balance sheet plus offer some recommendations.

 

How Banks Are Stealing CD Customers

Deposit Gathering

There is a current trend afoot of refinancing certificate of deposit (CD) customer in order to take deposit customers away from sleeping banks and credit unions. While one bank’s “theft” is another bank’s competitive gain, both sides should be cognizant of the ramifications of this move. Some banks may let these customers freely go while others will combat the assault with higher rates, greater marketing or an improved structure. In this post, we explore both the math, the profitability, how best to play defense and how to use this tactic offensively.

The Value of Callable CDs That Most All Banks Miss

Lowering Bank Funding Cost

If you handle deposits or look to issue a certificates of deposit special in the near-term, then you should read this because most banks get their callable certificates of deposit (CD) valuation completely wrong and, as a result, underutilize the product to help lower the funding cost of the bank. For the record, we are not advocates of any CD that markets on rate, as a majority of time a customer’s predilection for rate is highly correlated to low or negative lifetime value.

How to Make Sure Your Liability Duration is Real

Liability management

Many banks have their certificates of deposits modeled on their asset-liability systems without optionality. That is, they treat the final maturity as gospel with little weight given towards repayment.  This could be a mistake, as just assuming the forward curve is accurate, CD’s are set to exhibit about a 20% shorter duration than modeled. In a rising rate environment, banks are short the option value of a CD and thus are exposed to a market loss in the form of opportunity cost should the investor redeem early.

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