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
Regulation sets out specific requirements with regard to behavioural assumptions, especially given their pre-eminence in the outcomes of interest rate risk in the banking book (IRRBB) measures. Common products with embedded behavioural options are:11 See BCBS (2016), points 44 and 45; EBA (2018), pp 36–39.
fixed rate loans subject to prepayment risk;
fixed rate loan commitments;
term deposits subject to early redemption risk; and
non-maturity deposits (NMDs).
In particular, the BCBS standards published in April 2016 and applied since the beginning of 2018, among the many principles that the banks have to adopt to proper measure, manage and control the interest rate risk (IRR) stemming from the banking book, require guidance on the model validation of the key behavioural assumptions of all products with embedded options.
A FRAMEWORK TO VALIDATE NMD BEHAVIOURAL MODELS
With regard to the model validation of NMDs, Table 13.1 shows what should be the focus of the analysis by banks on this financial product, and also the key dimensions that influence their actual IRR profile.
Furthermore, regulation requires