SAN FRANCISCO, Feb. 7, 2019 – The Money Anxiety Index, which measures the level of financial anxiety based on what people actually do with their money, is showing signs of an economic slowdown. The February index at 46.5; is the same as January but higher than its turning point of 43.2 in November of 2018. In the past 8 years, the index dropped from a high of 100.5 to its current level – a drop of 54 index points.
A new study featuring the Money Anxiety Index was recently published in the Journal of Applied Business and Economics. The study,”Dynamics of Yield Gravity and the Money Anxiety Index,” demonstrates how the Money Anxiety Index measures the level of financial anxiety of people based on what they actually do with their money rather than how they respond to consumer confidence surveys.
The Money Anxiety Index is highly predictive. In a lag analysis test of the ability of the index to alert the banking system of a looming recession and an increase in the default rate of loans, the Money Anxiety Index provided an advance notice of 8 months prior to the increase in the rate of loan defaults and allowance for credit losses. Thus, the Money Anxiety Index functions as an economic predictor in two models currently used by the banking system.
“It took over ten years to research, write and publish the impact of money anxiety on the banking system,” said Dr. Dan Geller the developer of the Money Anxiety Index and President of Analyticom.”After witnessing the devastation caused by the last financial crisis of 2008/2009, I was determined to find a way to provide the banking system with an early warning system about the next recession. The ability to see ahead is paramount if we want to keep the banking system safe and stable.”
The Money Anxiety Index is used as an economic predictor in two models currently used by banks and credit unions nationally. The first behavioral economics model, Defaults Dynamics, provides banks and credit unions with an advance notice of 8 months before their loan defaults start rising. In addition, the model adjusts their Current Expected Credit Losses (CECL) to reflect higher credit losses due to an approaching recession.
The second model, Deposits Dynamics, allows banks and credit unions to price their deposits optimally to avoid liquidity runoff and excessive interest expense. The Deposits Dynamics model adjusts interest rates on deposits to the responsiveness of consumers based on the economic environment. Thus, banks and credit unions have better control over their interest expense and over the management of their liquidity.
The Defaults Dynamics CECL model is critical due to a newly-established banking regulation on reporting Current Expected Credit Losses (CECL), which mandates that all financial institutions forecast their future loan losses based on the economic conditions over the life of the loan. In other words, financial institutions must use an economic predictor to forecast their credit losses, not just for the current year, but into the future. Thus, if the U.S. economy is headed towards a recession, the CECL model must alert the banking system in advance and adjust their loan losses accordingly.
Both models, Defaults Dynamics and Deposits Dynamics, can be instantly used by financial institutions. No software installation is required, and no sensitive data transfer to outside destination is needed. Both models provide a 98 percent confidence level in the outcome within the upper and lower limits. And above all, both models used a scientifically-validated economic predictor allowing banks and credit unions to see ahead and stay ahead of the next recession.
Analyticom is a behavioral economics firm dedicated to providing banking executives with financial foresight. Analyticom provides the banking industry with advanced analytics and scientific models that forecast the impact of behavioral economics on banking products. The mission of Analyticom is to assist banking executives see ahead and stay ahead.
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 models 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. He is the author of the groundbreaking book on the impact of Money Anxiety on the economy.
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