Journal of Risk

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Modeling nonmaturing deposits: a framework for interest and liquidity risk management

Emil Avsar and Benjamin Ruimy

  • We present a generic framework for modeling nonmaturing deposits that can be used by banks for interest rate risk and balance sheet management.
  • The framework allows the practitioner to calibrate both the rate dependence of the cashflows between different types of deposits as well as the vintage specific run-off of each type of deposits.
  • A concrete model calibrated on UK industry corporate sight and time deposit balance series published by the Bank of England is presented together with forecasts obtained under different interest rate scenarios.

We present a generic framework for modeling nonmaturing deposits that can be used by banks for interest and liquidity risk management, funds transfer pricing and dynamic balance sheet management. The framework is split up into the modeling of the fraction of funds held in different deposit categories, which captures cashflows between products, and the modeling of the sight and time deposit rates. Combining these different components, together with assumptions on market share for individual institutions as well as the growth of the money supply, the framework then predicts the institution-specific balance composition of deposits under different interest rate scenarios. We calibrate the model framework on UK industry corporate sight and time deposit balance series published by the Bank of England, and present forecasts obtained under different interest rate scenarios.

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