A Guide to Behavioural Modelling
First published:
ISBN: 978-1-78272-404-9
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The Stakeholders of Interest Rate Risk Behavioural Models
Roberto Virreira
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
[If we] carry a “small-scale model” of external reality, [we] are able to react to future situations before they arise, utilise the knowledge of past events in dealing with the present and the future, and in every way to react in a much fuller, safer, and more competent manner. Craik (1943)
Behavioural models have been in place in the banking industry since its inception: banking is not possible without understanding whether customers will pay their loans or withdraw their deposits. Assume, in the absence of reliable information, that all customers may withdraw their deposits or that none would repay their loans – this would render banking impossible. Banks need to understand past events and forecast future scenarios as part of their core business. Bankers are also required to discern whether they can lend and borrow in a profitable way, and depend on behavioural models to predict whether customers will keep their deposits, prepay their loans or demand banking products contingent upon the margins they are charged. The concept of interest rate risk in the banking book (IRRBB), along with liquidity and credit risk, define the basics of the business model of a bank.
IRRBB
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