Why Are Savings Accounts Perceived as Risky Bank Products?

Abstract

Risk management for banking products can be challenging in general, but is even more risky in a global, low interest rate environment. This paper deals with the risk management of savings accounts, a bank product defined as a non-maturing account with embedded option that bears a relatively attractive rate of return. We focus on the interest rate risk of savings accounts. By constructing the replicating portfolio and simulating market rates and client rates, we show that under the severest scenario, some banks in the Czech Republic might face a significant capital shortage in next two years if market rates start to increase dramatically from recent low levels. We conclude that savings accounts are riskier liabilities than current accounts and term deposits for banks. Moreover, we propose imposing stricter regulation and supervision on these bank products since they might increase systemic risk of the Czech banking sector in coming years.

Bank Mergers in the Financial Crisis – A Competition Policy Perspective

“…In the savings market, in contrast, pricing is driven by the banks' motivation to raise funding required to issue loans (besides e.g. cross-selling) (Džmuráňová & Teplý, 2016;ACM, 2014). In addition, switching is less costly in the savings market (ACM, 2014;van der Cruijsen & Diepstraten, 2017) such that there is a higher importance of smaller fringe banks offering higher interest rates.…”

“…Banks can also use savings accounts as instruments meant to acquire client information, or to cross sell(Džmuráňová & Teplý, 2016).…”