As another summer fades into the review mirror, I think back to all those family vacations my wife and I took our kids on and the all too familiar question that came every year as we got closer to our destination (and the end of my patience); “Are we there yet?” And just like how we never seemed to get to that destination fast enough, the banking industry just can’t get to a place of deposit stability fast enough either.
Following the Economic Crisis, we saw a massive “surge” of funds into banks and credit unions as depositors sought safety and a place to “park” money until better returns were again available in the market. In early 2020, after market rates had jumped a bit, I crafted a blog declaring the death of surge deposits, but then quickly had to shift as we saw a new round of “surge deposits” following the Government’s release of trillions of dollars in Covid-related Stimulus funds.
Then, as deposit rates shot up in 2023, we saw a massive movement of funds from low-cost checking and savings deposits into higher-yielding CDs and MMDAs. Now, as we near the end of 2025, we at least seem to see light at the end of the tunnel - and have hope that this period of deposit migration is finally over.
Given all the options available when it comes to CD specials and premium money market accounts offered by both bank and non-bank entities, it would certainly seem reasonable that all rate sensitive depositors have had the chance to move their money in search of higher returns. It would then also seem logical that we can assume some level of increased stability in those balances that didn’t leave during the migratory period of 2023 to 2025.
Unfortunately, what seems reasonable or logical to financial institution managers may not always sync up with what examiners and regulators think. As a result, the onus is on you to not only support your assumptions, but to also show how much impact they have on your IRR model and how that model has performed over time. To do that, we strongly suggest that your asset liability management program includes decay rate and deposit trends studies, back testing, and sensitivity testing.
Decay Rate and Deposit Trend Studies
While the “surge deposit” era appears to be behind us, that doesn’t mean the implications of all that deposit movement has completely worn off your balance sheet. Now, decay studies will be paramount to understanding the behavior of your current non-maturity deposits. Be sure that those studies also include a full deposit trend analysis that considers how your deposit levels and mix have changed in recent years and what impact that might have on future deposit stability. By reviewing current accounts, closed accounts, and run-off rates, you’ll have a solid view into the volatility of your deposit portfolio.
Backtesting
Backtesting is a process of comparing actual versus forecasted results. The exercise should not just test IRR model results, but also key model assumptions. The goal of backtesting is to gauge model performance in times of changing market rates, and thereby identify possible areas to adjust the model (change assumptions, inputs, scenarios, etc.) to improve its predictability. Annual backtesting should suffice, unless market conditions are particularly tumultuous or market rates have widely fluctuated.
If you’d like to dive deeper, I’ve written several pieces detailing the ins and outs of backtesting, from top questions, to why it’s so important. To review these posts, click here.
Sensitivity Testing
A form of stress testing, sensitivity testing, will also be an annual hot-button initiative for any financial institution – especially come exam time. Sensitivity testing aims to identify model vulnerabilities and stress test worst-case scenarios. Sensitivity testing involves making material changes to key model assumptions in order to determine which assumptions have the most impact on model results. Whether conducted in-house or by a third-party, regulators want to see that organizations are adequately testing the assumptions they have in place to ensure that capital adequacy is planned for, and inherent risks are mitigated.
At Plansmith, we suggest that, at a minimum, your sensitivity testing program include three separate sensitivity tests focused on the Regulatory-identified key model assumptions: asset prepayments, non-maturity deposit repricing, and non-maturity deposit decay rates.
Next Steps
We understand that these types of analyses can feel overwhelming, depending on an organization’s resources. Plansmith’s team of former examiners can help alleviate the burden of these compliance-related activities quickly, effectively, and affordably. Click here to discuss your unique needs.
Director of ALM Advisory Services