SAN FRANCISCO, Nov. 29, 2016 /PRNewswire/ -- A new study, "Dynamics of Yield Gravity," shows that banks are at risk of not having enough term liquidity (Certificates of Deposits) during the next financial crisis that would be needed to comply with the latest liquidity requirements of the FDIC. That's because interest rates of deposits lack the ability to attract term deposits during times of high money anxiety, according to a new peer reviewed scientific study by Dr. Dan Geller and Professor Nahum Biger.
The authors of the study, Dr. Dan Geller and Professor Nahum Biger, were invited to present and publish the "Dynamics of Yield Gravity" after the paper passed a double-blind peer review by two international conferences on economics and finance. The first conference is the International Conference on Business and Economic Development, which will be held on April 10-11, 2017 in New York, USA, and the second conference is the 13th International Conference on Economics, Finance and Management Outlooks April 27-28, 2017 in Dubrovnik, Croatia.
Stringent liquidity requirements were put in place after the financial crisis of 2008-2009, when banking regulators worldwide established new guidelines at their conference in Basel, Switzerland. The latest Basel III Revised Liquidity Framework requires banks to maintain some level of their bank deposits for a period of one year and over in order to cover losses from loan defaults and avoid a repeat of the need for a government bailout of banks. However, the new study shows that higher interest rates failed to attract term deposits during the Great Recession due to diminishing gravitational pull, thus placing banks at a greater risk of default during the next major financial crisis.
The study shows that during the Great Recession and its aftermath, 2008-2012, the average rate of Certificate of Deposits (CDs) was nearly 5 times that of liquid accounts (checking, savings and money market). Yet the amount of bank deposits in CDs decreased by 22 percent, while balances of liquid accounts increased by 78.9 percent. Moreover, the study shows that during the same time period of 2008-2012, the Money Anxiety Index, used to measure the level of financial stress and anxiety, increased from 58.8 (May 2008) to 100.82 (June 2012).
"The implications of this study," said Dr. Dan Geller, "suggest that financial institutions should incorporate behavioral economics into their forecasting and pricing models to ensure that deposit rates are optimally positioned to control interest expense and manage required liquidity levels."
"Moreover," notes Professor Biger, "recognition of the dynamics of yield gravity phenomenon by the banking, economics and finance sectors is the starting point in developing measures to offset the adverse impact diminishing gravity of yield has on interest expense and long-term liquidity."
About Dr. Dan Geller
Dr. Dan Geller is a behavioral economist who pioneered the research and application of behavioral economics to the banking services. Through his research firm, Analyticom, Dr. Geller provides banking executives with scientific forecasting and pricing tools enabling them to improve financial performance. Dr. Geller is a frequent speaker and media guest. He appeared on national TV and radio, such as CNBC and Fox, and delivered the keynote address at the American Banker's Symposium.
Dr. Geller is the author of the behavioral economics book Money Anxiety which was named a "must read book" by Business Insider. He is also the developer of the Money Anxiety Index, which pointed to a looming recession 14 months in advance because it is the only financial confidence index that measures what people do rather than what people say in response to confidence surveys and opinion polls.
About Professor Nahum Biger
Professor Nahum Biger is an Emeritus Professor of management and financial economics. He received his Ph. D. from York University in Toronto and published more than 70 articles in academic journals. He published five books and conducted numerous consulting reports. Professor Biger was the founding Dean of the Graduate School of Business at the University of Haifa, Israel and served at that capacity for 8 years.
Professor Biger was sent on several missions of the World Bank to Botswana and to Chile. He is a regular economic advisor to governments and to courts of law as an expert on economic and financial issues.
Professor Biger was and continues to act as a visiting professor at top universities. He was a visiting professor at Northwestern University, University of California at Davis, University of Cape Town, University of Rotterdam and the Peter Drucker Graduate School of management in Claremont, California.
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