A Framework for Developing NMD Behavioural Models

Matteo Formenti and Umberto Crespi

In a commercial bank, the main items subject to a behavioural model are non-maturity deposits (NMDs), which may include different types of products with no explicit cashflows. These products have an undefined contractual maturity: clients have the option to withdraw any amount from the account either without a notice period or just a very short one, and the bank has the option to change the interest paid on the deposit at any time within legal constraints.

The liquidity and interest rate risk management of these products are a crucial part of asset and liability management (ALM) and their modelling requires special attention as they represent the main source of funding for a commercial bank. The behavioural model for NMDs aims to identify which part of an NMD is unlikely to be withdrawn, and represents a stable source of funding (stable volume), and which is unlikely to be repriced and can be considered as a fixed rate liability (core volume) (BCBS, 2008; EBA, 2018). For the purpose of managing the liquidity risk, the stable volume is often considered as a medium long-term liability without any specific maturity, while for interest rate risk management the core volume is allotted

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