On Application of Physical Models in Banking Risk Estimation: Valuing the Demand Deposits

The paper presents a review of existing approaches to valuation of demand deposits. Special attention is paid to the approach for demand deposits valuation, which is based on relaxation phenomenon. Such phenomenon may be observed in magnetic, ferromagnetic and ferroelectric materials, as well as in the elastic, electric, and magnetic behavior of materials, and is defined as a delay or lag in the response of a linear system, measured relative to the expected linear steady state (equilibrium) values. The bank rate-setting mechanism for demand deposits is found to resemble closely the anelastic relaxations. The proposed framework may be applied in the course of risk assessment and management in commercial banks, as well as for banking regulatory policy development by supervisory authorities