Deposits typically constitute the majority of our clients' liabilities, and as such, accurate modeling of deposits is a critical component of the balance sheet management process.

QRM was among the first to offer a theoretically sound option-adjusted pricing model for determining the value and interest rate sensitivity of bank deposit accounts bearing administered rates and withdrawal options. This model makes it possible to evaluate the exposure of a financial institution's entire balance sheet--from assets and liabilities to changes in economic value--within a single consistent framework.

Accurate models of both deposit rates and volumes are necessary for valuation, hedging and forecasting. Because of the variety of competitive environments under which financial institutions operate their strategies for setting deposit rates and their depositors' strategies for deciding between alternative investments, can vary significantly across the industry.

Consequently, QRM works with clients to build processes that allow deposit models to reflect the characteristics of the operating environment. Clients have complete freedom in specifying the relationships between deposit rates, deposit volumes and market rates, the amount and type of any servicing costs/fees in the deposits' cash flows, and the effective maturity to be applied to the deposits.

QRM provides clients with three basic approaches to deposit and index rate modeling:

• The partial response model describes the behavior of many smoothly adjusting deposit and index rates, and allows for immediate and lagged asymmetric ("sticky") responses to changes in a risk-free interest rate
• The market rate model is an economic model in which the return to the modeled rate is a function of the return to a risk-free interest rate and the slope of the yield curve. Through its inclusion of a "rigidity sub-model," it can model discretely adjusting (fractional) deposit rates
• Clients may define their own simple or complex deposit rate models (including but not limited to ARMAX and other standard econometric time series models) using their Equation Builder

QRM also provides clients with three different forms of deposit volume modeling:

• The linear volume model describes volume runoff in terms of changes in a deposit or risk-free rate and seasonal factors
• The Nonlinear Volume approach, which describes volume in terms of a "core" component, and a component that grows and shrinks in response to a deposit or risk-free rate.
• As always, clients may define their own simple or complex deposit volume models using their Equation Builder

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