Blog
Uncertainty meets its match
In brief Despite an upturn in the economic outlook, uncertainty remains ingrained into business operations today. As a result, most corporate treasuries are
Find out moreLow interest rates, decreasing margins and regulatory pressure: banks are faced with a variety of challenges regarding non-maturing deposits. Accurate and robust models for non-maturing deposits are more important than ever. These complex models depend largely on a number of modelling choices. In the savings modelling series, Zanders lays out the main modelling choices, based on our experience at a variety of Tier 1, 2 and 3 banks.
Are you interested in a more in-depth comparison of deposit modeling concepts? Click here.
For banks with significant non-maturing deposits portfolios, Risk Management functions need to have a robust behavioural risk model. This model is required for Interest Rate Risk in the Banking Book reporting, hedge, stress testing, risk transfer, and ad-hoc analyses. Although specific modelling assumptions vary per bank, cashflow-based models, a replicating portfolio model, or a hybrid model are market practice model concepts. The choice for one of these models is strongly linked to model purpose and use. Each concept has its benefits and drawbacks for different purposes and uses.
Cashflow-based models consist of two sub-models for the deposit rate and volume that forecast coupon and notional cashflows, respectively. Both sub-models measure the relationship between behavioural risk and underlying explanatory factors. Cashflow-based models are suited to include asymmetric pricing effects (such as flooring of rates) in resulting risk metrics. Since the approach captures rate and volume dynamics well, it is also often used for ad-hoc behavioural risk analysis and stress testing.
"The choice for one of these models is strongly linked to model purpose and use."
Replicating Portfolio models replicate a deposit portfolio into simple financial instruments (e.g., bonds) such that its risk profile matches the risk profile of the underlying deposits. The advantage is that it converts a complex product into tangible financial instruments with a coupon and maturity. This simplified portfolio is well-suited to transfer risk from business units to treasury departments. A disadvantage of the model is that it does not fully capture non-linear deposit behaviour, for example the asymmetric pricing effects resulting from the floor. This makes the approach less suited for stress testing or ad-hoc behavioural risk analysis for senior management.
Read our extensive analysis of replicating portfolio models here.
Hybrid models, consisting of both a cash flow model and replicating portfolio model, combine the benefits of the other approaches, but at the cost of increased complexity. These models are often used by banks that want to use the model for a wide range of purposes: risk transfer to treasury departments, risk reporting, ad-hoc behavioural risk analysis, and stress testing. To prevent a larger mismatch between the models, most banks ensure that the risk profiles (duration or DV01) of both models align.
This short article is part of the Savings Modelling Series, a series of articles covering five hot topics in NMD for banking risk management. The other articles in this series are:
In brief Despite an upturn in the economic outlook, uncertainty remains ingrained into business operations today. As a result, most corporate treasuries are
Find out moreAfter a long period of negative policy rates within Europe, the past two years marked a period with multiple hikes of the overnight rate by central banks in Europe, such as the European
Find out moreOn the 22nd of August, SAP and Zanders hosted a webinar on the topic of optimizing your treasury processes with SAP S/4HANA, with the focus on how the benefit from S/4HANA for the cash &
Find out moreIn the high-stakes world of private equity, where the pressure to deliver exceptional returns is relentless, the playbook is evolving. Gone are the days when financial engineering—relying
Find out moreThe Basel IV reforms, which are set to be implemented on 1 January 2025 via amendments to the EU Capital Requirement Regulation, have introduced changes to the Standardized Approach for
Find out moreWith the introduction of the updated Capital Requirements Regulation (CRR3), which has entered into force on 9 July 2024, the European Union's financial landscape is poised for significant
Find out moreThe heightened fluctuations observed in the commodity and energy markets from 2021 to 2022 have brought Treasury's role in managing these risks into sharper focus. While commodity prices
Find out moreVaR has been one of the most widely used risk measures in banks for decades. However, due to the non-additive nature of VaR, explaining the causes of changes to VaR has always been
Find out moreThe Covid-19 pandemic triggered unprecedented market volatility, causing widespread failures in banks' internal risk models. These backtesting failures threatened to increase capital
Find out moreChallenges with backtesting Expected Shortfall Recent regulations are increasingly moving toward the use of Expected Shortfall (ES) as a measure to capture risk. Although ES fixes many
Find out moreAcross the whole of Europe, banks apply different techniques to model their IFRS9 Expected Credit Losses on a best estimate basis. The diverse spectrum of modelling techniques raises the
Find out moreAs organizations continue to adapt to the rapidly changing business landscape, one of the most pivotal shifts is the migration of enterprise resource planning (ERP) systems to the cloud.
Find out moreWhile many business and SAP users are familiar with its core functionalities, such as limit management applying different limit types and the core functionality of attributable amount
Find out moreIn brief: Prevailing uncertainty in geopolitical, economic and regulatory environments demands a more dynamic approach to default modelling. Traditional methods such as logistic
Find out moreThe recent periods of commodity price volatility have brought commodity risk management to the spotlight in numerous companies, where commodities constitute a substantial component of the
Find out moreIn brief Prepayment modelling can help institutions successfully prepare for and navigate a rise in prepayments due to changes in the financial landscape. Two important prepayment
Find out moreThe corporate landscape is continuously reshaped by strategic realignments such as mergers, divestments, and other M&A activities, wherein a company divests a portion of its business
Find out moreThe evolving economic landscape has placed a spotlight on the critical role of treasury in value creation. Our latest roundtable, themed ‘Treasury’s Role in Value Creation,’ delved
Find out moreThis article highlights key points mentioned in our whitepaper: Treasury 4.x - The age of productivity, performance and steering. You can download the full whitepaper here. Summary:
Find out moreWhether a corporate operates through a decentralized model, shared service center or even global business services model, identifying which invoices a customer has paid and in some cases,
Find out moreIn a continued effort to ensure we offer our customers the very best in knowledge and skills, Zanders has acquired Fintegral.
In a continued effort to ensure we offer our customers the very best in knowledge and skills, Zanders has acquired Optimum Prime.
You need to load content from reCAPTCHA to submit the form. Please note that doing so will share data with third-party providers.
More Information