Evidence of early withdrawal in time deposit portfolios

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.