A Guide to Behavioural Modelling
First published:
ISBN: 978-1-78272-404-9
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The Nature of IRRBB and Typical Metrics Employed
Jacek Rzeznik
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
To consider the management of interest rate risk arising from non-trading book activities and the metrics used to gauge this risk, it is essential to first start with defining and providing an overview of the sources of this risk. Once this has been achieved, it is possible to explore the nature of this risk and its different facets, which we will expore using both the net interest income (NII) and economic value (EV) perspectives, as well as by examining the interaction between them and the importance that behavioural models play in this regard. Finally, we will introduce some of the typical metrics employed by banks to measure the risk from each perspective.
DEFINITION AND SOURCES OF IRRBB
Since the early days of banking, activities and services offered to clients have served the purpose of transformation and intermediation on various levels.
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Volume: Many individual deposits funding large loans.
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Term (maturity): Deposits available at sight and loans offered for longer periods (such as a 30-year mortgage).
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Cost of borrowing/interest rate preference: Offering fixed and floating rate products.
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Currency: Deposits or
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