Austrian Federal Economic Chamber - Division Bank and Insurance
The depth of existing relationship with the client is one of the key factors influencing the probability of a deposit withdrawal under a combined idiosyncratic and market-wide stress scenario. The proposed definition of ‘established relationship’ offers a good and overall guideline. In our opinion, the ‘minimum duration’ of contractual relationship should be set at 1 year at least. This relates especially to ‘financially sophisticated individuals’ and ‘high net worth individuals’ as they are more likely to consider creditworthiness of an institution when making withdrawals regardless of the length or depth of relationship.
Transactions (such as salary, mortgage payments, credit card payments, any other comparable periodical income and transactions, etc.) which are regularly credited and debited to an account significantly decrease the probability of a withdrawal or closing of such accounts thus making this type of account a ‘transactional account’.
It depends on the depth of the institution; client relationship is hardly uniform across various markets. However, the following indicators should generally point to ‘actively managed accounts/relationships’:
• The client has a ‘bundle’ of products (e.g. savings, transactional account, mortgage, credit cards, etc.)
• Client has a history of inflows/outflows to/from its savings/transaction account
In our view, deposits between EUR 100.000 (or local DGS) and EUR 1 Mio should be seen as high, and deposits above EUR 1 Mio should be considered as very high. When considering the value of client’s deposit, all of a client’s deposit accounts with the institution (or group) should be taken into account.
The proposed criteria, although logical, are also very complex and somewhat ambiguous. The concept of ‘average rate for similar products offered by peers’ is a very hard one to define and can be subject to multiple interpretations. This weak definition could lead to heterogeneous measurement practices across markets and institutions, which cannot be aligned with a level playing field approach. Hence simpler criteria (such as a fixed threshold or a threshold that depends on official rates plus a fixed spread) should be considered and tested.
Residency factor, although plausible, is not necessarily an indicator of the higher withdrawal rates. Researches could not find non-resident deposits to be highly correlated with higher levels of withdrawals. In our opinion, EU and non-EU residency does not necessarily mean that the deposit is likely to be withdrawn or not. For example, during ‘Cyprus crisis’, depositors from EU and from outside EU were equally eager to withdraw their deposits. In a market wide or institution specific stress situation, deposit outflow is highly dependent on client’s confidence; hence institution related characteristics, like business model, credit rating, local, regional and global significance, should have more weight on deposit outflow than residence.
It is mentioned at EBA’s impact analysis that additional resource requirements following these proposals will be substantial for the institutions. Implementation of proposed systems and indicators will require significant efforts, from manpower to business model changes. The cost-benefit ratio for the additional measuring of higher outflow rates cannot be estimated in a serious manner at this stage. But it should be recognized that initial costs as well as running costs are substantial and any regulatory condition should be defined while considering this aspect.
It is extremely difficult to estimate the costs of implementing these proposals at this stage. The costs will clearly depend on the final list of factors. However, any simplification of the factors and removal of highly correlated factors will at least keep costs at bay. This will be especially the case with multinational institutions where there is a great variety of regulation, diversity of IT systems, and where client related information is not always at hand.
To implement, track and apply these complex factors, institutions need to build reliable time series which is very difficult to do in short time horizon. The regulator should especially focus on simpler factors and defined conditions instead as currently many institutions simply do not have time series required to analyse proposed factors.
An additional point is that there is compounded complexity when value of deposits are paired with product specific factors (product features such as step up rate, early withdrawal penalties, etc…) which make application of outflow rates on the aggregated deposit value unclear.