The Handbook of ALM in Banking (2nd Edition)
First published:
ISBN: 9781782723455
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Modelling Non-Maturing Deposits with Stochastic Interest Rates and Credit Spreads
Introduction
Bank Capital and Liquidity
ALM in the Context of Enterprise Risk Management
The New Basel Standards on IRRBB and Their Implications for ALM
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
Replication of Non-Maturing Products in a Low Interest Rate Environment
Managing Mortgage Prepayment Risk on the Balance Sheet
Considerations for ALM in Low and Negative Interest Rate Environments
Credit Spreads
Hedge Accounting
Supervisory Views on Liquidity Regulation, Supervision and Management
Measuring and Managing Liquidity and Funding Risk
Managing Reserve Assets
Instruments for Secured Funding
Asset Encumbrance
Capital Management
A Global Perspective on Stress Testing
Reverse Stress Testing: Linking Risks, Earnings, Capital and Liquidity – A Process-Orientated Framework and Its Application to Asset–Liability Management
XVAs and the Holistic Management of Financial Resources
Optimal Funding Tenors
Funds Transfer Pricing in the New Normal
Balance-Sheet Management with Regulatory Constraints
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 approach allows the management of the present value – also referred to as economic value – of client deposit portfolios.
Following this introduction, a brief overview of the scope of the deposits product is provided. Subsequently, a static approach to constructing replicating portfolios is given. We then describe the simultaneous modelling of deposit volumes, interest rates and credit spreads and illustrate simulation results. The specific topics of hedge ratios for the margin compression risk and applications to decay models follow. 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
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