A Guide to Behavioural Modelling
First published:
ISBN: 978-1-78272-404-9
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The Choice of Maturity Profile in NMD Behavioural Models
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 first goal of an NMD behavioural model is to obtain a stable and a core volume amount. The second goal is choosing the maturity profile. These two goals are fundamental for the management of interest rate risk in the banking book (IRRBB) and balance-sheet optimisation. The difference between the two is lies within the banking activity. While the first goal is in the scope of the developer of behavioural models (who sits in the risk management or the asset and liability management, ALM, department), the second is more a strategic view, and is usually under the responsibility of asset/liability committee (ALCO) members, or even board members.
The stable volume is the best estimate of the stable source of funding that is highly likely not to run-off under stress conditions, while the core volume is part of such a stable volume that is not repricing in the future.11 Following Basel (2016) “The stable NMD portion is the portion that is found to remain undrawn with a high degree of likelihood. Core deposits are the proportion of stable NMDs which are unlikely to reprice even under significant changes in the interest rate environment.” On the other hand, the maturity profile is
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