Valuing Sticky Deposits

Matthias Fleckenstein, Shohini Kundu and Francis Longstaff

No 34641, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a formal fixed-income framework to value sticky deposits. This framework provides closed-form expressions for deposit values and allows us to study the impact of stickiness on deposit interest-rate and runoff risks. The duration of a bank deposit can be either positive or negative, which has important implications for hedging the interest-rate risk of bank balance sheets. Banks that maximize deposit value by following optimal deposit beta strategies may significantly increase their interest-rate and deposit runoff risks. We test the empirical implications of the valuation model using market deposit premia observed in bank merger/acquisition transactions. The results provide strong empirical support for the model’s predictions.

JEL-codes: G12 G51 (search for similar items in EconPapers)
Date: 2026-01
Note: AP
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