A Benchmark Framework for NMDs: An Application

Antonio Castagna, Antonio Scaravaggi and Bernardo Rapagnetta

This chapter presents an application of the stochastic risk factor approach to model the non-maturing deposits, and sketches a framework to assess the related expected profitability and the liquidity and duration risks of a bank. More specifically, we calibrate the model to artificial data provided by the authors for the sight deposits of two different banks. This artificial set-up has been defined to highlight the flexibility required for behavioural models. These models should be able to describe depositors’, banks’ and market’s characteristics. For this purpose this approach is applied to different customer ’s segments to capture and explain their different behaviour and sensitivities.

The modelling of deposits and non-maturing liabilities is a crucial task for the liquidity and ALM of a financial institution. It has become even much more momentous since the liquidity crisis that struck the interbank money market in 2008–09.

Typically, the ALM departments of banks involved in the management of interest rate and liquidity risks face the task of forecasting deposit volumes so as to design and implement consequent liquidity and reinvestment strategies. Moreover, deposit

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