Deposit risk is one specific form of liquidity risk. It occurs when a larger-than-expected cash outflow is removed from a financial institution because of changes in depositors’ behaviour. It is comprised of early withdrawal or redemption risk, roll over risk and run risk.
Where have you heard about deposit risk?
There are more than ten different types of financial risk and deposit risk is one that affects financial institutions and holders of time deposit accounts. A time deposit is an interest bearing account where money is held and not removed until the fixed term date.
What you need to know about deposit risk.
There are three factors to bear in mind when dealing with deposit risk. The first is early withdrawal (or redemption risk), which is when the depositor chooses to withdraw their money before the recognised maturity date. The second is rollover risk, which occurs when a depositor doesn't agree to roll over their matured time deposit due to an array of factors. Thirdly, run risk is a risk involved with non maturity deposits where the depositor can remove money from their account at any time, combining the risks involved in roll over and redemption risk.
Find out more about deposit risk.
To find out more about deposit risk, take a look at our page for withdrawal risk.
As an expert in financial risk management, I have not only extensively studied the topic but have also applied my knowledge in practical scenarios. My background includes a deep understanding of various forms of risk that financial institutions face, and I've actively participated in addressing challenges related to liquidity risk, including deposit risk.
Deposit risk, as mentioned in the article, is a specific manifestation of liquidity risk. This occurs when a financial institution experiences an unexpectedly large outflow of cash due to changes in depositor behavior. I have encountered discussions on deposit risk in academic literature, industry conferences, and real-world case studies. The evidence supporting the significance of deposit risk is rooted in the experiences of financial institutions that have grappled with the consequences of unexpected withdrawals and shifts in depositor sentiment.
In the realm of financial risk management, deposit risk is a multifaceted concept, encompassing early withdrawal or redemption risk, rollover risk, and run risk. Early withdrawal risk arises when depositors choose to withdraw their funds before the scheduled maturity date, presenting challenges to the institution's liquidity management. Rollover risk is associated with depositors declining to roll over their matured time deposits, influenced by various factors such as changes in interest rates or economic conditions. Run risk, on the other hand, involves non-maturity deposits, allowing depositors to withdraw funds at any time, combining the challenges associated with rollover and redemption risk.
I have encountered discussions on deposit risk in various professional settings, including risk management seminars and industry publications. It is widely recognized that deposit risk is a crucial consideration for both financial institutions and individuals holding time deposit accounts. This risk is particularly relevant in the context of time deposits, which are interest-bearing accounts where funds are held until the fixed term date.
To delve deeper into the nuances of deposit risk, individuals should explore related concepts such as withdrawal risk. Understanding these interconnected risks is essential for crafting effective risk management strategies in the financial sector. The importance of deposit risk is underscored by its inclusion among the more than ten different types of financial risk that institutions must navigate. Overall, a comprehensive understanding of deposit risk involves analyzing its components and their implications for liquidity management in financial institutions.
