Non-Maturity Deposit Modeling: Balance Sheet Management Considerations
In this 2-day workshop, we begin with an exploration of the key role behavioral assumptions around non-maturity deposits (NMDs) play in the measurement and management of interest rate risk (IRR), liquidity risk (LR) and product profitability.
Banks and credit unions are prone to be cavalier or lazy with the assumption setting process for NMDs; some institutions arbitrarily assign durations and liquidity values that are not robust to any material market stress, while others hand the modeling problem to an internal or external “quant” and then just accept whatever values come out of the model. Neither approach acknowledges the dynamic nature of NMD values or the role the firm itself, i.e. product management, plays in influencing product behaviors.
It is clear that the calibration process that David has designed is at least as important as the model itself; I now believe that this process is mandatory if you want to truly understand the behavior of one’s deposits and how they can positively influence the measurement and management of both risk and profitability. – ALM/FTP Manager, Pinnacle Financial Partners
In the workshop, I demonstrate a behavioral model for NMDs I designed. It produces monthly ALM feeds which are derived from vintage-level decay functions, rate betas and a dynamic measure of balance volatility. The model also leverages has an integrated FTP engine which is used to calculate FTP rates and spreads over the full historical time series of data used to calibrate the model, the current position as well as future periods that may be considered for budgeting and forecasting exercises. By computing FTP rates directly within the behavioral model, deposit gatherers have a vested interest in considered how product behaviors (over which they have some control) drive the crediting rate they receive. They come to learn that the FTP crediting rate is not arbitrary; it reflects the economic value that is generated by each product.