A Guide to Behavioural Modelling
First published:
ISBN: 978-1-78272-404-9
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Implementing Regulatory Guidance on IRRBB Behavioural Models: Challenges and Opportunities
Enrique Benito
Implementing Regulatory Guidance on IRRBB Behavioural Models: Challenges and Opportunities
Introduction
Insights on Banks’ Recourse to Behavioural Models from a Focused IRRBB Stress Test
Implementing Regulatory Guidance on IRRBB Behavioural Models: Challenges and Opportunities
The Stakeholders of Interest Rate Risk Behavioural Models
Governance of Behavioural Models
The Nature of IRRBB and Typical Metrics Employed
A Framework for Developing NMD Behavioural Models
The Literature on NMD Behavioural Models
Interest Rate Risk of Non-maturity Bank Accounts: From Marketing to Hedging Strategy
NMDs and IRRBB: A Methodological Proposal for a Behavioural Model
NMD Modelling: A Financial Wealth Allocation Approach
A Benchmark Framework for NMDs: An Application
NMD Behavioural Models Used in Marketing
The Validation of NMD Behavioural Models
The Choice of Maturity Profile in NMD Behavioural Models
Acknowledging the Elephant in the Room: The Mismatch Centre
Prepayment Risk Modelling for ALM, Finance and FTP: A Survival Model
Modelling of Prepayment on Fixed Rate Residential Mortgages: A Logistic Regression Approach
A Simple Approach to Modelling Prepayment Events
Integrating Credit Risk within the ALM Framework
Modelling Committed Credit Lines
Accounting of the Sight Deposit and Hedging
The capital adequacy regulatory framework considers interest rate risk in the banking book (IRRBB) under Pillar 2, requiring banks to develop their own methodologies and processes for the identification, measurement, monitoring and control of IRRBB, including behavioural models. The methodologies, internal processes and assumptions used are considered within the supervisory review and evaluation process (SREP) carried out by supervisors. As a result, regulatory bodies have set out expectations regarding the methodologies and processes that banks need to develop in relation to IRRBB. The original interest rate risk (IRR) principles published by the Basel Committee on Banking Supervision (BCBS) in 2004 were updated and subjected to extensive consultation in 2015, when two options were presented for the regulatory treatment of IRRBB: (i) a novel standardised Pillar 1 approach; and (ii) an updated Pillar 2 approach with several enhancements to reflect changes in markets and supervisory practices experienced since 2004. The heterogeneous nature of IRRBB, as well as the complexities involved in formulating an accurate and risk-sensitive standardised measure, meant that incorporating
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