Deposit Pricing
The Key Role of Core Deposits in Interest Rate Risk Analysis
Part 1: Pricing Retail Deposits and Services
by Tom Farin
This is the first of a four part series dealing with evaluating the rate sensitivity of core deposits. This article deals with:
- Retail and wholesale market definitions
- Basic marginal cost calculations
- Effects of rate sensitivity on the marginal cost of funding
This article is cross-listed in this section because of its focus on deposit pricing. Remaining articles in this series can be found in the Interest Rate Risk Analysis section.
Managing Retail Deposits in a Rising Rate Environment
Introducing a Marginal/Marginal Approach
By Tom Parliment
May-June 1993
This article looks at pricing deposits when rates are rising using marginal cost as a framework for analysis.
- Basic marginal cost analysis
- Introducing marginal/marginal calculation methodology
Using Total Rate of Return Analysis to Evaluate Alternative Funding Sources
By Tom Farin
In this article, Tom Farin extends the concept of TRR to choice between funding alternatives. In the Fort Knox savings & Keep example, he looks at three alternative ways of funding growth.
- Why TRR can also be used in evaluating alternative funding sources.
- Fort Knox Savings & Keep - base institution.
- Using TRR to evaluate alternatives in funding growth.
- Raising rates on existing deposits.
- Borrow from FHLB.
- Purchase a branch.
- Conclusions drawn from the analysis.
This article provides useful background material on how to think through the financial effects of alternative funding sources including retail deposits.
CD Wars - A Report From The Front - Part 1
By Tom Parliment
November-December 1994
In this article, Tom Parliment reviews marginal cost pricing and evaluates the potential affect of competitive response to an institution's pricing initiatives on these marginal costs.
- Marginal cost analysis verses relationship pricing.
- Core deposit rate sensitivity.
- CD rate sensitivity.
- Paying up on existing money to raise new money.
- Using CD specials as an alternative way of going after rate-sensitive funds.
- Considering the impact of potential competitor response.
CD Wars: Valuing Depositor Relationships - Part Two
By Tom Parliment
January-February 1995
Tom Parliment looks at the effect on franchise value of attracting retail deposits at sub-wholesale rates.
- The value of being able to raise depositor funds at sub-wholesale funding rates.
- Determining a bogey for valuing deposits.
- Calculating the effect of different pricing strategies on franchise value.
- Pricing to grow the balance sheet.
- Factoring in the effect of competitor response.
Differentiated Pricing In Segmented Markets
By Tom Parliment
November-December 1995
Tom Parliment examines the advantages associated with pricing deposits differently in different markets. Marginal cost analysis is used to show how decentralized pricing can be used to enhance the bottom line.
- Calculating marginal revenues and costs market by market.
- ting favorable markets.
- Implementing the theory.
Effective Deposit Pricing - Part 1
By Tom Farin
January-March 2001
In this first article in a multi-part series, Tom Farin introduces marginal cost analysis and explains why it is the only effective tool for making product pricing decisions. This article is written at a basic level for board members and non-financial managers.
- Slaying the average cost dragon.
- Marginal cost - the only way to make effective deposit pricing decisions.
- Using marginal cost to make decisions.
- Marginal cost is driven by old money/new money relationships.
Segmenting your customer base. - Regular savings example.
- Why tiering up doesn't work.
- Running the numbers - segmenting example.
- Tuning the example.
Effective Deposit Pricing - Part 2
By Tom Farin
January-March 2001
In this second article in a multi-part series, Tom Farin introduces the use of a wholesale funding bogey in evaluating which deposits are well and poorly priced. He then introduces a set of rules for pricing CDs that allows an institution to 'pay the best rate', without 'paying the best rates'.
- Using a bogey to identify well priced deposits.
- Calculating the wholesale bogey.
- Using the bogey to make funding decisions.
- Managing CD pricing.
- Separating CDs into time bands.
- Why you can't afford to pay the best rates.
- Why it is more affordable to pay the best rate.
- When to run a defensive special.
Effective Deposit Pricing - Part 3
By Tom Farin
January-March 2001
In this third article in a multi-part series, Tom Farin applies segmentation techniques to pricing non-maturity deposits. He shows how to implement a tier-down strategy in falling rate environments and why it is to the institution's benefit to do so.
- Managing non-maturity deposit pricing.
- Dealing with falling rates.
- Implementing a tier-down strategy.
- Segmenting non-maturity deposits in other ways.
- Early payday checking.
- Premium checking.
Upgrading Your Deposit Pricing Process – Part 1 – Reinventing the Process
November 2002
Topics include:
- Setting up deposit sectors.
- Developing a pricing strategy for each sector.
- Weekly decision making process
- Upgrading committee reporting
- Determining whether the pricing strategy is still working.
- Determining whether the environment has changed
Upgrading Your Deposit Pricing Process – Part 2 – Using Effective Pricing Tools
November 2002
Topics include:
- Developing effective deposit benchmark rates.
- Making pricing decisions based on marginal cost.
November 2002
Topics include:
- Segmentation strategy overview.
- Applying segmentation strategies to CD sectors.
- Analyzing a ‘pay the best rates’ strategy.
- Analyzing a pay the ‘best rate, not the best rates’ strategy.
- Backtesting deposit pricing decisions.
- Offensive versus defensive CD specials.