44.4 Deposit Penalty for Early Withdrawal
Term deposits may be subject to the risk of early withdrawal, also called early redemption risk. To assess this risk and take appropriate action you must be able to identify term deposits where the depositor has no legal right to withdraw before maturity. If the depositor can legally withdraw before maturity then you must be able to identify that so early withdrawals are not resulting in a significant financial loss to the depositor. Penalties normally do not reflect such an economic calculation but instead are mostly based on a simpler formula such as a percentage of accrued interest. In such cases, there is potential for changes to profit or loss arising from differences between the penalty charged and the actual economic cost of early withdrawal. It is not possible to have a standard number that would mean significant financial loss. It is left to the bank to decide what is significant or insignificant..
To address this, the following attributes are available in the FSI_D_TERM_DEPOSITS and FCT_COMMON_ACCOUNT_SUMMARY tables:
- Early redemption permitted flag: This indicates whether the customer as the legal
right to withdraw term deposit before maturity or not. This will have two
values:
- Y = Early redemption is permitted
- N = Early redemption is not permitted
- Significant early withdrawal penalty flag: This indicates whether early withdrawal
leads to significant financial loss to customer or not. This will have two
values:
- Y = Significant penalty
- N = Non-significant or no penalty