Why is a Core Deposit Study So Important?

Why is a Core Deposit Study So Important?

Measuring the interest rate risk profile of a financial institution requires a comprehensive understanding of its deposit base, particularly non-maturity deposits. These deposits, which do not have a fixed maturity date, pose unique challenges in assessing how they will behave in response to changes in market interest rates. A core deposit study is essential for providing insights into the historical behavior and future sensitivity of these deposits, thus enabling better risk management and decision-making.


This Market Insight is structured to outline the objectives, methodology, and implications of a core deposit study, with a focus on sensitivity analysis and retention assessment.




The primary objectives of a core deposit study are:

  • Sensitivity Analysis: Understanding how the rates paid on non-maturity accounts have historically behaved in relation to changes in market rates. This involves assessing the correlation between historical deposit rates and market rates, and estimating potential future deposit rate changes under different scenarios.
  • Retention Assessment: Determining the retention rates, decay rates, or assumed terms for each core deposit type. This aspect of the study is influenced by various factors such as local competition, historical interest rates, demographics, and depositor behavior.



The core deposit study is divided into two main sections: Sensitivity and Retention.



  • Historical Correlation: By analyzing historical data, we determine the correlation between deposit rates (by account type) and market interest rates. This helps us understand which account types are more sensitive to changes in rates.
  • Future Rate Estimation: Using the historical correlation as a basis, we estimate how deposit rates are likely to change in response to different scenarios of market rate movements. This provides insights into potential future repricing behavior.


  • Retention Rates: Each core deposit type is assigned a retention rate, reflecting the percentage of deposits that are expected to remain with the financial institution over time.
  • Decay Rates or Assumed Terms: Some models may use decay rates or assume a fixed term for non-maturity deposits. These terms are determined based on past depositor behavior and local market conditions.



The selection of repricing sensitivity and retention terms has significant implications for the financial institution’s risk profile:

  • Risk Management: Accurate estimation of deposit behavior is crucial for effective interest rate risk management. By understanding how non-maturity deposits will react to changes in market rates, the financial institution can better assess and mitigate its risk exposure.
  • Model Assumptions: Core deposit study findings provide valuable inputs for Asset Liability Management (ALM) models. These inputs help ensure that the models accurately reflect the financial institution’s deposit dynamics, leading to more reliable risk assessments and strategic decision-making.

A core deposit study is a critical component of measuring and managing interest rate risk for financial institutions. By analyzing historical deposit behavior and estimating future sensitivity and retention, the study provides essential insights for ALM modeling and strategic planning. The findings of the study inform key assumptions and help financial institutions make informed decisions to optimize their risk-return profile.


To ensure your financial institution stays ahead in managing interest rate risk and making informed decisions, consider conducting a comprehensive core deposit study today. Contact us at [email protected] to start your core deposit study and enhance your strategic planning efforts.