NMDs and IRRBB: A Methodological Proposal for a Behavioural Model

Rosa Cocozza, Domenico Curcio and Igor Gianfrancesco

According to the accounting-based duration methodology to measure banks’ exposure to the interest rate risk in the banking book (IRRBB) adopted by the Basel Committee on Banking Supervision (BCBS, 2004), both on- and off-balance-sheet sensitive items are allotted into the time bands of a maturity ladder following specific criteria. Within such a measurement framework, the assumption of a constant sensitivity coefficient for all demand and negotiable order of withdrawal deposits is a serious weakness since, given their relevance within commercial banks’ balance sheets, their embedded optionality might hinder a proper assessment of IRRBB and a correct estimation of the associated economic capital.

If the hypotheses underlying the allotment of non-maturity deposits (NMDs) across the time bands of the maturity ladder were not consistent with their actual behaviour, in terms of both sensitivity to movements in the reference market rates and volume changes over time, the estimated economic capital might be not in line with banks’ actual riskiness. This would have negative consequences both if a bank underestimates its actual exposure to the IRRBB and in the event of an overestimation