Final answer:
Demand deposits are focused on in the repricing model due to the asset-liability time mismatch, with banks facing the challenge of aligning short-term liabilities with long-term assets. Banks do not keep all deposits on hand to prevent liquidity issues and bank runs, operating instead on a fractional reserve system. Debates against their inclusion as rate-sensitive liabilities often mention depositors' insensitivity to interest rate fluctuations.
Step-by-step explanation:
Demand deposits require special attention in the repricing model due to the asset-liability time mismatch. This mismatch happens because while customers can quickly withdraw their demand deposits, such as those in checking accounts, a bank's assets, particularly loans and bonds, are often repaid over a much longer term. This can create severe problems for a bank if a high level of loan defaults occurs or if there are substantial changes in interest rates.
One major concern with demand deposits as rate-sensitive liabilities is the risk of bank runs, which arises when numerous customers withdraw their funds simultaneously. Banks do not keep the majority of deposits on hand because they operate on a fractional reserve system, where they invest or loan out most of the deposits to earn interest. Banks maintain a reserve level; however, keeping too much in reserve would inhibit profitability and the bank's ability to provide loans.
Arguments against counting demand deposits as rate-sensitive liabilities include the idea that many depositors do not actively seek higher interest rates for their checking accounts and thus may not be as sensitive to changes in interest rates as supposed.