The embedded options found in some securities are known to have significant
impact on product pricing, secondary market valuation, and risk measuremen
t and management. The option to withdraw commonly found in bank deposits is
one of the least studied of these. We help to fill this gap by examining t
he level and interest rate sensitivity of early withdrawals of retail time
deposits using panel data from the Thrift Financial Report. We find that lo
nger-maturity time deposit portfolios commonly experience early withdrawals
at economically significant levels. Further, we rnd that depositors respon
d positively, with increased levels of early withdrawal, to the reinvestmen
t incentive they face when new deposit rates rise. These findings increase
our understanding of consumer behavior with regard to financial products an
d have significant implications for the competitive pricing of deposit prod
ucts and the management of bank interest rate risk.