Oscillatory Regimes of Attraction of Banking Retail Term Deposits

Ihor Voloshyn

05 March 2014

Version 1

Working paper

Ihor Voloshyn
PhD., doctorant
The University of Banking of the National Bank of Ukraine (Kyiv)

28-a, Artema Str.,

04053, Kyiv, Ukraine
Tel. +38 044 486 5214
vologor@i.ua
1

Electronic copy available at: http://ssrn.com/abstract=2574104

Abstract
Dynamics of turnovers of deposit accounts was studied by numerically solving
Volterra summation equation. The obtained picture corresponds qualitatively to the
actual oscillations of turnovers that are often observed in banking practice. It is
shown that oscillatory regimes appear not only under non-decreasing (upward
sloping) maturity profiles of deposits, as theory predicts, but and under downward
sloping and humped ones.

Keywords: retail term deposit, bank, balance, credit turnover, debit turnover, term to
maturity, maturity profile, depositing regime, oscillation, Volterra sum-difference
equation, discrete-time model, asset and liability management

JEL Classifications: G21

Electronic copy available at: http://ssrn.com/abstract=2574104

1. INTRODUCTION

Retail term deposits are a key source of financing for Ukrainian banks. As of January
01, 2015, the share of term deposits of individuals in total liabilities of Ukrainian
banks was 27.3%, and the share of total deposits of individuals was 35.6% (NBU,
2015). As a result, Ukrainian banks wage a fierce struggle for funds of depositors.
Such a situation with depositing is characterized not only for Ukraine but has World
tendency. So, we have been seeing some very strong competition in the deposit
market in the recent period (Edey, 2010). Thus, the banks compete with each other
by deposit products, interest rates, loyalty programs, etc.
Note that in post-crisis environment, banks need to employ analytics to more
precisely differentiate and target specific deposit types supporting balance sheet and
margin objectives (PwC, 2011). The financial crisis has changed the formula for
profitably managing deposits (PwC, 2015).
To develop effective programs for attraction of retail deposits is extremely
important to clearly understand mechanisms of formation of banks' deposit base. This
makes possibility to find new ways for further improvement of banks deposit
management, and respectively assets and liabilities management. There are at least
two approaches to the banks deposit management. The first approach involves
maintaining deposit balances in accordance with budgeted values. This approach is
fully consistent with needs of CFO and his or her point of view on the deposit
management. The second way is to carry out the planned credit turnover of deposit
attraction. Advanced approaches require that deposit portfolio should also have a
given average maturity or even a certain profile of terms to maturity. The approach is
more relevant to needs of banks business units which attract deposits. As such
approach works with primary processes that form the deposit balances.
As shown in paper (Voloshyn, 2014), deposit activity operated through deposit
balances can lead to making wrong managerial decisions.
Note that the deposit management through credit turnover is more complex but
also has more prospects to increase controllability of depositing. The complexity of
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this process is explained by highly sensitivity of attracted volumes to changes in

market conditions and behavior (in particular, irrational behavior) of depositors. The
actual dynamics of balances, credit and debit turnovers of deposit accounts in Fig. 1
illustrates such a complexity. A question consists in a correct interpretation of this
dynamics and appropriate justification of deposit management decisions. Among the
real dynamics it should be able to identify different regimes of depositing and to find
boundaries of regime existence.
700
680
660
640
620
600
580
560
540
520
500

Amount in mln UAH

14
12
10
8
6
4
2
0
50

70

90

110

130

Dt (left scale)
Ct (left scale)
B (right scale)

150

Days

Fig. 1. The actual dynamics of balances, credit and debit turnovers of deposit
accounts for one of Ukrainian banks

With regard to this purpose, it is advisable to use theoretical models of deposit

activity including dynamics of both balance and turnovers. Such continuous-time
deterministic models are very scarcely explored. One can find a very limited number
of investigations devoted to this topic (Voloshyn, 2004, 2005, 2007, 2014; Selyutyn
and Rudenko, 2013; Friedman, 2004). However, these models are very attractive
because they allow to apply a rich arsenal of methods of functional analysis, to
provide a clear picture of depositing processes, to identify common patterns of
deposit dynamics, and in such a way to deepen an understanding of deposit formation
mechanisms.
This investigation pursues the theoretical studies been started in papers
(Voloshyn, 2004, 2005, 2007, 2014). They have been examined the impact of
4

changes in credit turnovers and average maturities on deposit dynamics for the case
when maturity structure of deposits obeys downward sloping, exponential
distribution.
The main conclusion of the studies (Voloshyn, 2004, 2005, 2007, 2014) is the
fact that banks operate primarily in transient regimes. There was formulated useful
law of deposit conservation for transition from one stationary maturity distribution to
another. And there was established that dynamics of deposits is exhaustively
determined by changes in credit turnovers and average maturities of deposits. It was
found that after a long time and under constant credit turnover and average maturity
of deposits, the deposit balances tend to constant values. Therefore, in order to a
banking deposit portfolio will continuously rise it is needed uninterrupted growth of
credit turnover (Voloshyn, 2014).
An important conclusion is that the average term to maturity cannot be
considered as early warning liquidity indicator recommended by Basel III (BIS,
2008).
It was established that dynamics of deposits can be unobvious and lead to
erroneous decision-making. So, a reduction in credit turnover with simultaneous
increase in average term to maturity of deposits may, in the beginning, result in fall of
deposit volume and then in further growth. To escalate supply of deposits and thus to
stop this temporary drop in the deposit balances a bank may increase interest rates on
its deposits. It may lead to undesirable increase in interest expense and to over-plan.
Nonetheless, over the short time, the drop of the deposit balances will replace further
deposit growth.
Conversely, an increase in credit turnover with simultaneous decrease in
average term to maturity of deposits may, in the beginning, lead to an increase in the
deposit balances and then to downfall of deposits. During the short growth, a bank
may try to reduce interest rates on its deposits that over time will lead to reduction in
deposit supply. It could further deepen fall of deposits.

Let us pay attention to the fact that the continuous-time model and the
downward sloping, exponential distribution of term to maturity were used in papers
(Voloshyn, 2004, 2005, 2007, 2014).
It should be noted that, in general, possible main forms of maturity distribution
may be:
downward sloping curve when share of longer-term deposits are actually lower
than share of short-term deposits. Such a maturity distribution may be observed
in crisis circumstances in deposit market or when depositors expect to fall
interest rates on deposits. Example of the distribution may be exponential one,
upward sloping curve when share of short-term deposits are actually lower than
share of longer-term deposits. Such a maturity distribution is characterized for
depositors expectation of decrease in interest rate,
humped curve when shares of long term and short term deposits are almost
similar and share of medium term deposits is high forming a hump shape. Such
a maturity distribution is characterized for normal market conditions in
Ukraine.
Of course, it is possible to find more complex forms of maturity distribution.
Note that a real maturity profile of banking term deposits is usually discrete but
not continuous. In other words, terms to maturity of deposits are usually standardized,
for instance, one-month, three-month, half-year, nine-month, one-year, etc. There are
typical terms to maturity in Ukrainian deposit market.
Therefore, the aim of the paper is to investigate an impact of changes in
discrete maturity profile on deposit attracting regimes.

2. DISCRETE-TIME MODEL OF BANK DEPOSITING

Consider deposit dynamics caused by sudden stepwise change in maturity profile at

time t > 0. Then the profile remains invariable. We put to use results obtained by
Voloshyn (2014). There was found the next Volterra integral equation for debit
turnover Dt(t) of deposit accounts:
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Dt (t ) (t ) Ct new f (t s) ds RoR Dt ( s) f (t s) ds ,
0

(1)

where (t) is the repayment schedule of deposits existing at time t = 0,

t

(t) = Ct0 1 f 0 (u ) du ) ,
0

(2)

Ct0 is the initial credit turnover at time t = 0,

f0(t) is the initial maturity profile of existing deposits,
Ctnew is the constant (not dependent on time) program of attracting deposits from new
depositors or new credit turnover,
RoR = const is the rollover rate,
f(t),

(3)

is the new maturity profile of new and rolled over deposits.

Thus, the first term of the right part of equation (1) is cash outflow of existing
at time t = 0 deposits, the second term is cash outflow of new deposits, and the third
term is cash outflow of rolled deposits over.
Note that the initial (at time t = 0) deposits balances are equal to:

B(0) = (u ) du ,

(5)

We rewrite equation (1) in the next form of sum-difference equation of

Volterra type:
t 1

t 1

Dt (t ) (t ) Ct new f (t s) RoR Dt ( s) f (t s) ,
s 1

(6)

s 1

The credit turnover is equal to:

Ct(t) = Ctnew + CtRoR(t) = Ctnew + RoR Dt(t).

(7)

Then, the balances on deposit accounts at time t are equal to:

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B(t) = B(t-1) + Ct(t) Dt(t),

(8)

3. THEORETICAL STUDYS OF OSCILLATORY SOLUTIONS AND

STABILITY

At the beginning, consider properties of maturity distribution function f(t). A maturity

distribution function f(t) presents what share are deposits with maturities t, wherein:
I

f (i) 1 ,

(9)

f(t-k) > 0 for t k,

(10)

0 f(t) 1,

i 1

where I is the maximal maturity of deposits that a bank proposes. That is why,
t 1

lim f (t i) c .

(11)

t i 1

Denoting
t 1

p(t ) (t ) Ct new f (t s) ,

(12)

s 1

rewrite equation (6) in the next form:

t 1

Dt (t ) p(t ) RoR Dt ( s) f (t s) ,

(13)

s 1

Note that a function p(t) is bounded. Indeed,

lim (t ) 0 ,

(14)

i.e., a bank has not perpetual (with maturity t ) deposits. By inequality (11), the
second term of the right part of expression (12) is bounded too.
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Then, all unbounded solutions of (13) are oscillatory if f(t) is non-decreasing

function (Agarwal, 2000).
Because of (9), then at RoR < 1 the solutions of equation (13) are asymptotical
stable, and at RoR = 1 the one are only stable (Stevi, 2003).

4. EXAMPLE OF DISCRETE DEPOSIT DYNAMICS

Let a concrete example be represented here. Let after t > 0 a bank attract new deposits
and roll over repaid deposits with maturity profile f(m), and the initial maturity
profile of existing deposits are f0(m) (see Table 1). Note that the old and new maturity
profiles are humped. The time step for calculation was chosen equal to one month.

Table 1. Maturity profiles of new and rolled over deposits f(m), and existing deposits
f0(m)
Maturity

Term to maturity

distribution

1M

3M

6M

12M

f0(m)

6%

19%

69%

6%

f(m)

5%

10%

70%

15%

The initial average term to maturity was equal 5.5 months; and the new average
term became 6.35 months. Note that the maturity profiles in Table 1 are typical for
Ukrainian banks.
The input data for calculation are as follows: Ct0 = 1, Ctnew = 0.017,
RoR = 90%.
The graphs in Fig. 2 show the dynamics of balances, credit and debit turnovers
of deposit accounts caused by change in maturity profile from f0(m) to f(m) (see
Table 1).

0.30

1.4

0.29
0.28

Amount in bln USD

0.27

1.3

0.26
0.25
0.24
0.23

1.2

Ct (left scale)

0.22

Dt (left scale)

0.21

B (right scale)

0.20

1.1

0.19
0.18
0.17
0.16

1.0
0

10

20
Months

30

40

Fig. 2. Oscillatory regime of attracting term deposits under shift in maturity profile

As can be seen from the graphs in Fig. 2, the change in maturity profile from
f0(m) to f(m) has generated the damped oscillations of debit and credit turnovers.
Although the deposit dynamics in Fig. 1 and 2 are presented in different
timescales, the obtained picture corresponds qualitatively to the actual oscillatory
dynamics of turnovers in Fig. 1.
Results of investigations showed that oscillatory regimes appear not only under
non-decreasing (upward sloping) maturity profiles, as theory predicts, but and under
downward sloping and humped ones.
Note that the oscillating regimes significantly complicate the deposit
management by a bank. Therefore, the further investigation would be devoted to an
issue how to get rid of oscillating regimes of depositing?

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5. CONCLUSIONS

Dynamics of turnovers of deposit accounts was studied by numerically solving

Volterra summation equation. The obtained picture corresponds qualitatively to the
actual oscillations of turnovers that are often observed in banking practice. It is
shown that oscillatory regimes appear not only under non-decreasing (upward
sloping) maturity profiles of deposits, as theory predicts, but and under downward
sloping and humped ones.
As

well-known,

oscillating

regimes

significantly

complicate

deposit

management in a bank. Therefore, the further investigation would be devoted to an

issue how to get rid of oscillating regimes of depositing.

LITERATURE

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and Applications. NY: Marcel Dekker, Inc. 971 p.
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11

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10)

Voloshyn, I.V. (2007). The Dynamics of Banks Liquidity Gaps under

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