Savings modelling series: How ‘hidden savings’ impact the risk profile for banks

Low interest rates, decreasing margins and regulatory pressure: banks are faced with a variety of challenges regarding non-maturing deposits. Accurate and robust models for non-maturing deposits are more important than ever. These complex models depend largely on a number of modelling choices. In the savings modelling series, Zanders lays out the main modelling choices, based on our experience at a variety of Tier 1, 2 and 3 banks.

WHAT ARE HIDDEN SAVINGS?

Because the low or zero rates offered by banks provide little motivation to move money to savings accounts, many banking customers use their current accounts as savings account. It is very likely that customers will move part of this money to savings accounts when rates increase again. This ‘hidden savings’ or ‘savings substitution’ volume and savings accounts volume have the same interest rate sensitivity, including the asymmetric ‘flooring’ effect.

SO, HOW DO I DEAL WITH THEM?

Given the existence of these hidden savings, it might be justified to model it with a shorter maturity, thereby increasing funding stability. Because hidden savings proves to be very difficult to quantify and substantiate in practice, its modeling is still not general practice with Risk and ALM managers. The banks that do include the hidden savings effect typically use historical data-based approaches, combined with expert-based guidelines on the measurement approach and significance thresholds. Significance thresholds can be relative (a fixed percentage of total current accounts volume) or absolute amounts (for example 100 million euro of volume).

"Because the low or zero rates offered by banks provide little motivation to move money to savings accounts, many banking customers use their current accounts as savings account."

USING HISTORICAL DATA

Some banks use historical portfolio data to estimate the hidden savings portion of current accounts. Hidden savings is defined as the portion of volume after subtracting the volatile and long-term volume. The volatile (non-stable) volume is estimated based on intra-month (daily) volume fluctuations. The long-term, non-repricing, volume (core volume) can be estimated based on historical minimum volume levels.
Another measurement approach is to use account-level data to estimate the hidden savings volume. The average current account balance development over time is used to identify a trend of accelerating balance levels. Hidden savings is derived as the portion of current account volume above historically identified trends. To identify these historical trends, sufficient historical data on time periods with a significant difference between savings and current accounts rates are required.