Client behaviour deeply impacts a bank's liquidity, funding, interest-rate position and, consequently, the management of its asset/liability mismatch and related profitability. Therefore it is imperative that risk managers and modellers alike understand how to model client behaviour according to the needs of their business. It is the aim of this book to improve that understanding and highlight modelling techniques from the simple through to the complex, offering a broad suite of tools to improve the management of an institution's balance sheet.
Since the 2008 global financial crisis, there has been increasing interest from external stakeholders (regulators, shareholders, institutional investors) in understanding how client behaviour impacts banks profitability, as well as how banks manage their liquidity, funding and interest rate risk.
Matteo Formenti and Umberto Crespi of UniCredit Group have gathered together chapter authors from across the globe who are all experts in their field. This book will aim to explain in a simple and effective way how it is possible to model client behaviour for the proper management of an institution's balance sheet, and to expand the readers knowledge of the drivers behind behavioural models.
The book is divided into five parts:
- Part I: An Introduction to IRRBB
- Part II: NMD Behavioural Models
- Part III: Prepayment Behavioural Models
- Part IV: Behavioural Models for Non-performing Exposure and Non-committed Lines
- Part V: Accounting and Hedging
This book is required reading for model developers, risk managers, model validators and the regulators whose job it is to understand how institutions approached the regulatory requests.
A Guide to Behavioural Modelling proves that modelling client's behaviour involves several stakeholders, and can improve the awareness of business decisions in different areas - liquidity, funding, interest rate, internal transfer systems- but that there is no one-size-fits-all modelling solution. Rather, different approaches, from the simple to the most-advanced, are equally appropriate depending on the needs of the institution.
About the Authors
PART I: INTRODUCTION TO IRRBB
1. Insights on Banks? Recourse to Behavioural Models from a Focused IRRBB Stress Test
European Central Bank
2. Implementing Regulatory Guidance on IRRBB
Behavioural Models: Challenges and Opportunities
3. The Stakeholders of Interest Rate Risk Behavioural Models
4. Governance of Behavioural Models
5. The Nature of IRRBB and Typical Metrics Employed
PART II: NON-MATURING DEPOSITS BEHAVIORAL MODELS
6. A Framework for Developing NMD Behavioural Models
Matteo Formenti and Umberto Marco Crespi
7. The Literature on NMD Behavioural Models
Serena de Rienzo
8. Interest Rate Risk of Non-maturity Bank Accounts: From Marketing to Hedging Strategy
Swisscanto Invest by Z?rcher Kantonalbank
9. NMDs and IRRBB: A Methodological Proposal for a Behavioural Model
Rosa Cocozza; Domenico Curcio; Igor Gianfrancesco
University of Naples Federico II; University of Naples
Federico II; Extrabanca
10. Non-maturity Deposit Modelling: A Financial Wealth Allocation Approach
Francesco Frascarelli and Vanessa Pagliaccia
UniCredit Group SpA
11. A Benchmark Framework for Non-maturing Deposits: An Application
Antonio Castagna; Antonio Scaravaggi; Bernardo Rapagnetta
12. NMD Behavioural Models Used in Marketing
13. The Validation of NMD Behavioural Models
14. The Choice of Maturity Profile in NMD Behavioural Models
15. Acknowledging the Elephant in the Room: The Mismatch Centre
David Green Advisors, LLC
PART III: PREPAYMENT BEHAVIORAL MODELS
16. Prepayment Risk Modelling for ALM, Finance and FTP: A Survival Model
Pierluigi Coriazzi & Lisa Signani
17. Modelling of Prepayment on Fixed Rate Residential Mortgages: A Logistic Regression Approach
UniCredit Group SpA
18. A Simple Approach to Modelling Prepayment Events
Matteo Formenti and Mattia Rossi
UniCredit Group and KPMG
PART IV: BEHAVIOURAL MODELS FOR NON-PERFORMING EXPOSURE AND COMMITTED LINES
19. Integrating Credit Risk within the ALM Framework
Alina Preger and Sophie He
20. Modelling Committed Credit Lines
PART V: ACCOUNTING AND HEDGING
21. Accounting of the Sight Deposit and Hedging
Data Used in the Book
Matteo Formenti works at UniCredit Group, where he was initially in the group’s internal validation team on the internal models for pillar I and pillar II of the Basel Accords, with a focus on the validation of behavioural models for ALM purposes (interest rate and liquidity risk). Group Finance Department with a specific focus on ALM topics such as the development of behavioral models across the Central Eastern Europe and banking book interest rate strategy. Matteo currently manages the team in charge of executing and setting the fund transfer pricing within the Group. He is visiting professor of market risk at MIP (Milan Politecnique) and full professor of asset management at LIUC (University of Castellanza), and holds an MSc in economics and a PhD in finance with a theoretical and empirical thesis on asset pricing theory.
Umberto Crespi has over 20 years of experience in the banking sector. He started his career in 1999 on the financial engineering desk of Fineco Bank SpA, and after eight years became the Head of Treasury & ALM. In 2007, Umberto moved to the Group Finance Department of UniCredit Group to cover different activities, and in 2010 was appointed Head of the Model and Interest Rate Strategy team within Group ALM & Financial Planning, with responsibility for behavioural models and banking book interest rate risk strategy. Currently, he is the Head of the Operational ALM team within Group Finance Department. Umberto is a member of the European Banking Federation ALM IRRBB Working Group and the ASSIOM FOREX ALM Commission. He has a degree in monetary and financial economics from the Bocconi University in Milan.