In today’s volatile interest rate environment, banks face mounting pressure to safeguard margins while maintaining regulatory compliance and strategic agility. At the heart of this challenge lies the complexity of deposit behaviour—particularly core deposits, which, while traditionally viewed as stable, are increasingly influenced by demographic shifts, macroeconomic trends, and evolving customer expectations.
To address this, KPMG introduces a replicating portfolio approach to deposit duration modelling, designed to enhance interest rate risk management and support informed decision-making across treasury and asset-liability management functions.
This methodology, already adopted by ECB-supervised institutions, offers a robust framework for estimating deposit longevity and optimising Net Interest Income (NII) and Economic Value of Equity (EVE).
Understanding the pressure on margins
Margins are under strain due to a confluence of factors: rising rate volatility, regulatory constraints, and the behavioural unpredictability of non-maturing deposits (NMDs).
Traditional linear runoff models based on Weighted Average Life (WAL) often fall short in capturing the nuanced dynamics of deposit portfolios. As a result, banks must evolve their modelling techniques to remain resilient and compliant.
The European Banking Authority (EBA), through guidelines such as EBA/GL/2022/14, mandates that institutions evaluate both NII and EVE, imposing a five-year cap on WAL for core and non-core deposits.
This regulatory ceiling forces banks to balance income stability with valuation sensitivity, making the choice of maturity profile a strategic imperative.
A replication-based approach
KPMG’s replicating portfolio methodology offers a pragmatic solution. By modelling deposits as portfolios of financial instruments that mirror their cash flow characteristics, banks can better align their risk profiles with regulatory expectations. This approach distinguishes between core and non-core deposits:
- Core deposits, being more stable, are replicated using rolling portfolios of vanilla interest rate swaps. These swaps are distributed across maturity buckets, providing a smooth income profile and consistent duration alignment.
- Non-core deposits, due to their volatility, are replicated using short-term instruments such as the 1-month €STR, ensuring immediate rate responsiveness.
This behavioural segmentation allows for more accurate modelling of deposit dynamics and supports strategic decisions around hedge duration, capital efficiency, and balance sheet resilience.
Data-driven insights
Effective replication requires granular time series data on deposit balances, interest payments, and historical overnight rates. These inputs enable behavioural analysis and yield modelling, forming the foundation for calculating volatility-adjusted NII—a key performance metric in our framework.
By running simulations across different investment horizons, banks can identify the optimal duration profile for their deposit book, enhancing both profitability and risk management.
Regulatory alignment and strategic oversight
Beyond quantitative modelling, qualitative factors such as product strategy, client segmentation, and managerial oversight remain critical. The Central Bank of Ireland’s 2025 outlook emphasises integrated supervision and proactive resilience, elevating deposit modelling to a strategic function that bridges governance, consumer protection, and financial stability.
KPMG’s approach integrates these dimensions, ensuring that maturity profiles are not only analytically sound but also aligned with broader organisational goals and regulatory standards.
Proven delivery across institutions
KPMG has a strong track record of delivering IRRBB models that quantify interest rate sensitivity via NII and EVE. Our work spans the full lifecycle—from model design and validation to assurance and regulatory alignment. Recent engagements include:
- ALM Framework Review: Supporting a European GSIB in recalibrating WAL and redesigning FTP mechanisms to enhance margin stability.
- Internal Audit & Oversight: Conducting independent reviews of behavioural models for domestic banks, validating assumptions and strengthening governance.
- IRRBB Modelling: Translating regulatory requirements into actionable frameworks that support proactive risk management.
Our experts bring first-hand experience collaborating with peer institutions to build, validate, and implement robust IRRBB frameworks tailored to each client’s unique balance sheet dynamics.
Get in touch
If you have any queries related to deposit duration modelling, IRRBB frameworks, or margin optimisation strategies, please don’t hesitate to contact our team below. We’d be delighted to hear from you.
