Categories of |
Financial risk |
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Credit risk |
Market risk |
Liquidity risk |
Investment risk |
Business risk |
Profit risk |
Non-financial risk |
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.
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lead to dropping or even losing a liquidity of a financial institution if it cannot to attract new deposits instead of withdrawn ones.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]
An early withdrawal risk affects a rollover risk through decrease of cash flows that will be repaid in the future. The early withdrawal and rollover risks depend on a term to maturity of deposits. The more maturity, the more early withdrawal risk, and the lower rollover risk, and vice versa. The main financial determinants of the early withdrawal and rollover risks are interest rates of the financial institution and its competitors, term to maturity and age of deposit, credit rating of the financial institution, and amount of deposit insurance.
The considered types of deposit risk are usually evaluated by 'Cash Flow at Risk' (also CFaR) approach. Thus, 'Cash Flow at Deposit Risk' is possible cash outflows from a financial institution over a fixed period of time that are predicted with chosen confidence level.[9][10]