Head of Assets and Liabilities Management, Treasury Department
1. In a time of low-to-negative interest rates, what is the general strategy banks should take within the field of FTP?
If you think of FTP through the prism of its primary function, which is risk transfer, then interest rates level should be, in general, irrelevant for the FTP rules. The types of risks transferred should be clearly distinguished and care should be taken to not mix them up. It means that interest rate risk should be transferred with market rates, even if they are negative. The problem which banks face is that deposit rates are very often floored at “0”, either due to clients’ expectations or legal requirements. It can be tempting to make some “managerial adjustments” on FTP to make up for the negative IR, which is against the basic principle of FTP. In this case, even so the change in risk profile is a result of interest rate change, it impacts liquidity part, as the clients will change the behavior to protect their deposits. That’s the key point, the general FTP rules stay untouched, but the behavioral assumptions, on which the implemented models are based, should be revised and adjusted accordingly to reflect changes in clients’ behavior, what should be mirrored in FTP.
2. How has the NMD modelling evolved in the recent years, especially given the new regulatory requirements?
Over the years, the world in which banks operate became tougher and tougher from both perspectives: the regulatory one and business profitability management in competitive and demanding environment. To run a bank successfully, the right risk recognition is the key point. Models used by the banks are developing parallel with regulatory requirements and I believe it’s not due to the requirements but rather due to more risk awareness of the bankers. The bankers are very active in providing comments to consultative documents and have impact on the final shape of documents. Looking at the BCBS consultancy document for IRRBB and NMD treatment in Pillar 1 and Pillar 2 or the EBA guidelines on IRRBB management, which came into force early this year, the models developed towards modeling the NMD for longer time buckets, compared to ON buckets models, which were a common practice some time ago. However, this is a very dangerous practice, since overestimating the deposits' value leads to understatement of IRR an LR.
The new trend, also recommended by regulators, is behavioral modeling for NMD, and I see the real behavioral modeling as a next step in NMD modeling development, which is a must for risk aware banks, aiming to correct risk recognition and profitability management.
3. In which scenarios would you consider behavioral modelling of NMD the most efficient and resourceful option?
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