approach; ■ to rely on an assumed rate of amortization for the balances, say 5% or 10% each year; THEGLOBALMONEYMARKETS     ■ to divide deposits into stable and unstable balances, of which the core deposits are set as a permanent balance. The amount of the core bal- ance is set by the bank based on a study of the total balance volatility pattern over time. The excess over the core balance is then viewed as very short-term debt. This method is reasonably close to reality as it is based on historical observations; ■ to make projections based on observable variables that are correlated with the outstanding balances of deposits. For instance, such variables could be based on the level of economic growth plus an error factor based on the short-term fluctuations in the growth pattern.   Pre-Set Contingencies A bank will have committed lines of credit, the utilization of which depends on customer demand. Contingencies generate outflows of funds that are by definition uncertain, as they are contingent upon some event, for example the willingness of the borrower to use a committed line of credit. The usual way for a bank to deal with these unforeseen fluctuations is to use statisti- cal data based on past observation to project a future level of activity.   Prepayment Options of Existing Assets Where the maturity schedule is stated in the terms of a loan, it may still be subject to uncertainty because of prepayment options. This is similar to the prepayment risk associated with a mortgage-backed security. An ele- ment of prepayment risk renders the actual maturity profile of a loan book to be uncertain; banks often calculate an "effective maturity sched- ule" based on prepayment statistics instead of the theoretical schedule. There are also a range of prepayment models that may be used, the sim- plest of which use constant prepayment ratios to assess the average life of the portfolio. The more sophisticated models incorporate more parame- ters, such as one that bases the prepayment rate on the interest rate differ- ential between the loan rate and the current market rate, or the time elapsed since the loan was taken out.   Interest Cash Flows Assets and liabilities generate interest cash inflows and outflows, as well as the amortization of principal. The interest payments must be included in the gap profile as well.