A Guide to Behavioural Modelling
First published:
ISBN: 978-1-78272-404-9
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Acknowledging the Elephant in the Room: The Mismatch Centre
David Green
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 will explain how interest rate risk (IRR) and liquidity risk (LR), which are innate to every levered financial institution, create a profitability management problem that can only be solved within a comprehensive and well-functioning funds transfer pricing (FTP) framework. It will be demonstrated how the introduction of FTP produces a new business unit, the mismatch centre, which is a true profit centre that must be analysed and managed as rigorously as any other lending or deposit-gathering business unit if granular earnings attributions are to have economic integrity. The chapter will discuss the implications for risk and profitability management when the mismatch centre is ignored or arbitrarily manipulated, eg, when its earnings are forced to zero. Implications for risk governance, the development and use of behavioural models for non-maturity deposits (NMDs), risk and profitability management systems and regulatory considerations are also addressed.
At most banks, credit unions and levered financial institutions (FIs) in general, FTP is not an integral component of risk and profitability management frameworks; risk and profitability management are therefore
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