A Guide to Behavioural Modelling
First published:
ISBN: 978-1-78272-404-9
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NMD Modelling: A Financial Wealth Allocation Approach
Francesco Frascarelli and Vanessa Pagliaccia
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
This chapter contributes to the empirical literature on deposits modelling, analysing a time period between January 2009 and February 2018 during which there were several episodes of financial turmoil. These include the Italy sovereign debt crisis of 2011–12 and the new phase of European Central Bank (ECB) monetary policy in the second half of 2014, characterised by the introduction of non-standard measures (eg, a negative rate for deposit facilities, targeted longer-term refinancing operations, TLTRO, and asset purchases programmes), that have played an important role in influencing the liquidity allocation process of bank clients.
The preceding years of historically low rates combined with the application of floor options to non-maturity deposits (NMDs) (with zero return, even in the presence of negative market rates) have led to a reduction in banks’ net interest income (NII) and a consequent need to optimise the replicated volume of the NMDs investment strategy. This necessity can be addressed solely through the implementation of a model that makes it possible to estimate, in a reliable and not excessively prudent way, the evolution of NMDs to the macroeconomic variables.
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