For many banks, non-maturing deposits are a highly relevant source of funding. Due to the high degree of flexibility which the product provides to the customer for the usage and to the bank regarding interest rate adjustments, the management decision on how to invest the deposits, from an interest rate risk perspective, is anything but trivial. It can require a high degree of IRRBB know-how, market insights and bank-specific assumptions to build a deposit management approach, which is tailored to the bank.
Next to the economic benefits, extensive regulatory requirements by BCBS as well as international and national regulators (e.g. EBA, Fed, FINMA, PRA) define expectations regarding the modelling approach.
- Economic agenda: Persistently low interest rates, margin compression and rising deposit volumes require banks to consider looking into deposit models. A key driver of net interest income and liquidity are a direct result of the deposit model implementation. Therefore, the optimization of such models is an integral part of the stability in a bank's profit.
- Risk Management agenda: It is not necessarily conservative to model deposits as an overnight position as this highly depends on the scenario and the overall risk positioning of the bank. Risk management needs to aim capturing most adequately the risk pertaining to deposits for aspects such as liquidity, economic value, earnings and other risks. Therefore, the actual behavior of deposits has to be analyzed and fully reflected.
- Regulatory agenda: Deposit models are in focus of audits by national and international regulators. There is an increasing number of critical findings from on-site audits by supervisors.
The challenges, in particular from consistently low interest rate, for the modelling of NMD are recently significantly increasing, and banks need to understand better practice approaches and prepare for potential enhancements.
KPMG's free & quick deposit business analytics
Understanding the bank's challenges, we developed a business analytics. Simply answer a few questions about your current treatment of deposits and afterwards you receive a first assessment of your status, insights on better practices and trends in the industry.
Director, Financial Services
KPMG AG Wirtschaftsprüfungsgesellschaft