Dr. Dan Geller's Theory of Money Anxiety Integrated in New Banking Liquidity Requirement

SAN FRANCISCO, Oct. 22, 2020 /PRNewswire/ -- The Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System (collectively, the Regulators) are adopting a final rule to implement the Net Stable Funding Ratio (NSFR) requirement in all banking institutions with over $1 billion in assets effective July 1, 2021.  The newly established requirement by the Regulators puts heavier weight on deposits of one-year time horizon to ensure stable and adequate liquidity to support loan defaults.

The newly adopted liquidity requirement is consistent with Dr. Dan Geller's Theory of Money Anxiety featured in the study, "Dynamics of Yield Gravity and the Money Anxiety Index," co-authored by Dr. Dan Geller and Prof. Nahum Biger and published in the Journal of Applied Business and Economics.  The study concludes that: "The implication of the findings is that elevated level of money anxiety hampers the ability of banking institutions to comply with Basal III Net Stable Funding Ratio (NSFR) requirement of one-year-term liquidity."

The study demonstrates that high level of money anxiety, such as during the current COVID pandemic,  leads to a massive hoarding of money in liquid banking accounts (Checking, savings and money market), and a reduction in the amount of money in certificate of deposit  (CDs) accounts, which are considered more stable because of their time commitment.  The study also shows that people deposit and shift money to liquid accounts even though the interest rate they are getting is much lower compared to CDs.  This phenomenon supports the study's hypothesis that interest rates are less effective when the level of money anxiety is high.

According to the latest quarterly report from the FDIC, during the first 6 months of 2020, balances of liquid deposits in domestic FDIC insured banks increased by $2.5 trillion, while CD balances decreased by $200 billion.  This behavior is consistent with the findings of the study, which show that people shift their deposits to liquid accounts because it provides people with immediate access to the money in case of a financial need. This behavior is called "Mattress money" in behavioral economics because it resembles what people used to do before bank deposits were federally insured.

"I anticipated this behavior ever since I observed the same phenomenon during the 2008/2009 financial crisis," said Dr. Dan Geller, the developer of the Theory of Money Anxiety and the President of Analyticom.  "In the past 5 years, I presented the Theory of Money Anxiety in numerous banking conferences, and had the opportunity to personally discuss the theory with the FDIC Chairman Jelena McWilliams.  I think that the adoption of the study's recommendations will improve the stability the banking sector."

The study's findings point to inverse relations between interest rates of liquid accounts and balances of liquid accounts mediated by the level of money anxiety.  This means that when the U.S. economy is either in a decline or is stagnant, depositors are likely to deposit new money in liquid accounts, and/or shift rollover money from term accounts to liquid accounts in disregard to the relatively lower interest rates paid on liquid accounts.

This means that yield, in and of itself, has a diminishing capacity to attract deposits to term accounts during times of elevated money anxiety and thus, bankers need to rethink their strategy for acquiring and maintaining proper liquidity and interest expense levels.  This instinctive behavior hampers the ability of banks to comply with Basal III Net Stable Funding Ratio (NSFR) requirement of one-year-term liquidity.

About Analyticom LLC
Analyticom LLC is a behavioral economics research firm specializing in the application of behavioral economics in financial decisions.  The company is a pioneer in the study of behavioral economics in financial decision. For the first time ever, a scientific study co-authored by Dr. Dan Geller, the founder of Analyticom LLC, shows the impact of money anxiety on financial decisions.  The study, Dynamics of Yield Gravity and the Money Anxiety Index has been peer reviewed and published in the Journal of Applied Business and Economics and was presented by Dr. Geller in a keynote address at the Banking Analytics Symposium, and at the International Conference on Business and Economic Development.

For more information, go to www.analyticom.com

Contact
Dr. Dan Geller
[email protected]
415-891-3093

SOURCE Dr. Dan Geller