In my previous blog, "In the Blink of an Eye: How the Digital Age Intensifies the Risk of Bank Runs" (https://bankloch.blogspot.com/2023/06/in-blink-of-eye-how-digital-age.html) I discussed the increased risk of rapid bank runs in today’s digital age, particularly when customers hold substantial deposits in current and saving accounts, as they can be withdrawn almost instantly.

Obviously reject deposits is not a commercially viable option for banks. Therefore banks have to find a convenient way to convert excess (saving) deposits into alternative financial products, reducing the ease of immediate withdrawal and mitigating the risk of bank runs.
This strategy is not only beneficial for the bank (as it reduces the speed of withdrawals), but also for the customer, who can profit from higher interest rates.

Due to the convenience of saving accounts, many customers are hesitant to move their savings into other financial products. While investing in securities is of course still the best approach to put aside assets (for the long-term), this is still a big step for many customers. Term deposits can be the perfect intermediary solution (positioned between a saving account and investments), as it remains a product which is offered directly by the bank, is very flexible (both in terms of invested amount and duration) and has also a low-risk profile.

Unfortunately, term deposits are not as easily accessible as saving accounts in most banks. One potential solution is to relocate those products from "Investments" domain (where typically securities reside) to the "Daily Banking" domain (alongside the current and saving accounts).

Consider the following setup:

• On your saving account or the aggregation of your different saving accounts (with possibility to select which saving accounts to include or not in the aggregation), you can set a limit above which funds are automatically moved to a term deposit. Customers can define this limit manually or the bank can offer some standard settings such as six times your monthly expenses (a guideline for maintaining liquid assets) or the government-backed depository insurance amount (e.g. 100.000 EUR in most European countries).

• Once this limit is depassed, automatically a proposal to transfer the excess funds in a term deposit is generated. To avoid excessive order generations, certain minimum thresholds (e.g., waiting until a minimum excess amount of 500 EUR is reached) can be established.

• The term deposit orders are pre-filled with the following information:

  • Amount: the excess amount

  • Feeding account (and also account to return money to): the saving account. Note that if the limit is set on the aggregation of multiple saving accounts, it is advisable to create multiple term deposit orders, ensuring that each amount is taken (and returned upon maturity) from the right saving account. This linkage with the source saving account is crucial.
    Currently, most banks do not offer this functionality, making proper term deposit management challenging. For instance, if I am saving for a car, I would create a dedicated saving account for that purpose. When part of these savings is placed in a term deposit, it is important to track how much has already been saved for the car.

  • Term deposit selection: term deposit orders should be generated to achieve an equal yearly liquidity flow. For example invest in a 1, 2, 3, 4…​, 10-year long term deposit initially. Once this 1 to 10-year structure is established, any new excess funds from year X can be invested in a new 10-year term deposit, generating cash flow for year 10+X. By consistently adding a 10-year deposit, you can benefit from a higher interest rate (assuming a normal yield curve with higher rates for longer-term investments), while still having an annual cash-out for necessary liquidity.
    Obviously users should have the option to define the target amount to be freed each year and set the maximum duration of a term deposit. These parameters could also be dynamically adjusted based on past excess amounts and the current yield curve.

• When visualizing a saving account, it should be possible to display all associated term deposits, including

  • The total amount

  • An indication how much money can be liberated immediately at no cost and what would be the penalty to liberate everything immediately.

  • This indication can also be provided for different time periods, such as a 1, 2, 3…​ year period.

Implementing such a setup would give term deposits a level of convenience comparable to savings accounts and would make this product more accessible to individuals who currently keep all their funds in savings accounts. Moreover, it serves as a proactive response to the increased risk of bank runs, as discussed in my previous blog.

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