Deposit risk
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Deposit risk is a type of liquidity risk[1] of a financial institution that is generated by deposits either with defined maturity dates (then such deposits are called 'time' or 'term' deposits)[2] or without defined maturity dates (then such deposits are called 'demand' or 'non-maturity' deposits).
Deposit risk is a risk of probable cash outflows from a financial institution that is caused by changes in depositors' behavior. In its turn, it consists of early withdrawal or redemption risk, rollover risk and run risk.
- Early withdrawal risk of time deposits is a risk that a depositor withdraws his or her deposit from an account before the agreed-upon maturity date. It might occur when the corresponding option was declared in a deposit agreement or determined by local laws. When an early withdrawal is made, the depositor usually incurs an early withdrawal fee or penalty.[3][4]
- Rollover risk of time deposits is a risk that a depositor refuses to roll over his or her matured time deposit.[5][6]
- Run risk of non-maturity deposits is a risk that a depositor takes back money from his or her accounts at any time. Thus, a run risk has characters of both early withdrawal and rollover risks. For instance, it occurs when depositors expect a bank to fail.[7]
As a result, these risks might lead to dropping or even losing a liquidity of a financial institution if it cannot to attract new deposits instead of withdrawn ones. Wherein, the impossibility of the financial institution to refinance by borrowing in order to repay existing deposits is called a refinancing risk.[8]