The Handbook of ALM in Banking
First published:
ISBN: 9781782720119
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Modelling Non-Maturing Deposits with Stochastic Interest Rates and Credit Spreads
Introduction
New Regulatory Developments for Interest Rate Risk in the Banking Book
Bank Capital and Liquidity
ALM within a Constrained Balance Sheet
Measuring and Managing Interest Rate and Basis Risk
The Modelling of Non-Maturity Deposits
Modelling Non-Maturing Deposits with Stochastic Interest Rates and Credit Spreads
Managing Interest Rate Risk for Non-Maturity Deposits
Optimising Risk and Return of Non-Maturing Products by Dynamic Replication
Hedge Accounting
Bank Runs and Liquidity Management Tools
Strategies for the Management of Reserve Assets
Optimal Funding Tenors
Instruments for Secured Funding
Funds Transfer Pricing in the New Normal
Capital Instruments under Basel III
Understanding the Price of New Lending to Households
This chapter introduces an approach to hedging non-maturing deposits under stochastic deposit volumes, interest rates and credit spreads. The method described allows outflows to be captured from the unexpected weakening of the creditworthiness of a financial institution. Furthermore, it allows modelling of the negative convexity from margin compression risks, which are the risks of market rates falling close to or below a floor for interest rates paid to clients.
The second section of this chapter provides a brief overview of the scope of the deposits product. Subsequently, in the third section a static approach to constructing replicating portfolios is given. The fourth section describes the simultaneous modelling of deposit volumes, interest rates and credit spreads followed by a depiction of simulation results. The specific topic of hedge ratios for the margin compression risk follows. A summary concludes the chapter.
The approach described in this chapter is similar to the approach to hedging the present value of demand deposits presented by Jarrow and van Deventer (1998) and the method by Elkenbracht and Nauta (2006) for hedging the present value of the interest margin from
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