Restructuring the maturity of regulated deposits with treasury-bill futures
✍ Scribed by Rodney L. Jacobs
- Publisher
- John Wiley and Sons
- Year
- 1982
- Tongue
- English
- Weight
- 599 KB
- Volume
- 2
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
urrent regulations for financial intermediaries impose rigid constraints 011 C the interest rate maturity of deposit liabilities. While these regulations provide access to lower-cost funds, compared with the rate on borrowings of the same maturity, the maturity restrictions can generate undesirable assetlliability imbalances. This is particularly true at the short end of the maturity spectrum, where deposit instruments are limited to the six-month money market certificate (MMC), which is priced off the six-month Treasury-bill auction quote. Growth in MMC deposits over the last few years has produced significant changes in the balance sheet of many financial intermediaries. For example, Wells Fargo Bank currently has some $3.2 billion of these deposits, representing about 28% of total consumer deposits and 15% of total liabilities.
The concentration of liabilities in six-month MMC deposits can creatr a substantial mismatch between the interest rate maturity of assets and liabilities, which leaves a financial intermediary vulnerable to movements in interest rates. If MMC deposits are funding three-month-maturity loans, fur example, a rapid drop in rates could lead to negative spreads on these loans. This type of assetiliability imbalance would not arise if the intermediary could offer both a three-and sixmonth-maturity deposit, and could vary deposit rates in order to attract the optimal mix of three-and six-month deposits for funding its particular loan portfolio. Since regulations currently prohibit such flexible deposit instruments, an alternntive is to use the T-bill futures market to shorten the effective interest rate maturity of existing six-month MMC deposits.
This article discusses a futures hedging strategy used by Wells Fargo Bank to shorten the effective interest rate maturity of its MMC deposits. Section I discusses assetlliability management problems associated with MMC deposits. Section I1 develops a hedging model for MMC deposits and presents simulated hedge results based on historical data. Section 111 considers the accounting aspects of the futures hedge.