Savings and sight deposits are of key relevance to many banks for refinancing purposes. Due to the high degree of flexibility that the product offers the customer in terms of utilisation and the bank in terms of interest rate adjustments, deciding how the deposits should be invested from an interest rate risk perspective is anything but easy. It requires a high level of IRRBB expertise, market knowledge and bank-specific assumptions to develop an approach that is customised to the bank.
In addition to the economic added value, extensive regulatory requirements from the BCBS as well as international and national supervisory authorities (e.g. EBA, Fed, FINMA, PRA) define expectations of the modelling approach.
Economic agenda: Persistently low interest rates, margin compression and rising deposit volumes are forcing banks to look at deposit modelling. A significant driver of the bank's net interest income and liquidity situation is a direct consequence of the implementation of deposit models. The optimisation of such models is therefore an integral part of the stability of a bank's profit.
Risk management agenda: Modelling deposits as a short-term one-day position in the context of interest rate risk is not necessarily conservative, as this depends heavily on the scenario and the bank's overall risk positioning. Risk management must set itself the goal of modelling the risk associated with deposits as adequately as possible in terms of liquidity, present value, income and other risks. To achieve this, the actual behaviour of deposits must be analysed, fully modelled and managed.
Regulatory agenda: Deposit models are the focus of audits by national and international regulators. The supervisory authorities are increasingly criticising the topic.
The challenges for deposit modelling have recently increased significantly, particularly due to the persistently low interest rates. Banks need to understand the market approaches and prepare for possible improvements.
