Interest Rate Risk of Non-maturity Bank Accounts: From Marketing to Hedging Strategy

Andreas Blöchlinger

This chapter presents a coherent management framework for non-maturity accounts to derive the hedging strategy from the marketing strategy to generate stable net interest income. Our framework consists of three building blocks: (i) a discrete-time dynamic term structure model for the evolution of interest rates; (ii) an ordinal logistic regression for the bank’s pricing behaviour; and (iii) an autoregressive process with external variables for the customers’ withdrawal and prepayment behaviour. All blocks are based on the same periodic frequency. Hence, we can easily put them together for valuation under various interest rate and marketing assumptions, and to build the dynamic hedging strategy.

Managing the interest rate risk of non-maturity bank accounts to produce stable income, regardless of short-term movements in interest rates, is the not so simple task of the asset–liability management (ALM) department. As all modelling blocks in the framework are based on the same periodic frequency, eg, monthly time steps, we can easily put them together by means of Monte Carlo simulations for valuing non-maturity accounts in various interest rate environments and marketing assumptions