NMD Modelling: A Financial Wealth Allocation Approach

Francesco Frascarelli and Vanessa Pagliaccia

This chapter contributes to the empirical literature on deposits modelling, analysing a time period between January 2009 and February 2018 during which there were several episodes of financial turmoil. These include the Italy sovereign debt crisis of 2011–12 and the new phase of European Central Bank (ECB) monetary policy in the second half of 2014, characterised by the introduction of non-standard measures (eg, a negative rate for deposit facilities, targeted longer-term refinancing operations, TLTRO, and asset purchases programmes), that have played an important role in influencing the liquidity allocation process of bank clients.

The preceding years of historically low rates combined with the application of floor options to non-maturity deposits (NMDs) (with zero return, even in the presence of negative market rates) have led to a reduction in banks’ net interest income (NII) and a consequent need to optimise the replicated volume of the NMDs investment strategy. This necessity can be addressed solely through the implementation of a model that makes it possible to estimate, in a reliable and not excessively prudent way, the evolution of NMDs to the macroeconomic variables.

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