108. In making behavioural assumptions about accounts without specific repricing dates for the …

In making behavioural assumptions about accounts without specific repricing dates for the purposes of interest rate risk management, institutions should:

• (a) Be able to identify ‘core’ balances, i.e. deposits that are stable and unlikely to reprice even under significant changes in interest rate environment, and/or other deposits whose limited elasticity to interest rate changes could be modelled by banks.
• (b) Modelling assumptions for these deposits should reflect depositor characteristics (e.g. retail/wholesale) and account characteristics (e.g. transactional/non-transactional). A high-level description of the above categories can be found below:
• i. Retail transactional deposits include non-interest-bearing and other retail accounts whose remuneration component is not relevant in the client’s decision to hold money in the account.
• ii. Retail non-transactional deposits include retail accounts (including regulated ones) whose remuneration component is relevant in the client’s decision to hold money in the account.
• iii. Wholesale deposits include accounts from corporate and other wholesale clients, excluding interbank accounts or other fully price-sensitive ones.
• (c) Assess the potential migration between deposits without specific repricing dates and other deposits that could modify, under different interest rate scenarios, key behavioural modelling assumptions.
• (d) Consider potential constraints on the repricing of retail deposits in low or negative interest rate environments.
• (e) Ensure that assumptions about the decay of core and other modelled balances are prudent and appropriate in balancing the benefits to earnings against the additional economic value risk entailed in locking in a future interest rate return on the assets financed by these balances, and the potential forgone revenue under a rising interest rate environment.
• (f) Not exclusively rely on statistical or quantitative methods to determine the behavioural repricing dates and the cash flow profile of NMDs. Further, the determination of appropriate modelling assumptions for NMDs may require the collaboration of different experts within an institution (e.g. risk management and risk control department, sales and treasury).
• (g) Have appropriate documentation of these assumptions in their policies and procedures, and a process for keeping them under review.
• (h) Understand the impact of the assumptions on the institution’s own chosen risk measurement outputs and internal capital allocation decisions, including by periodically calculating sensitivity analyses on key parameters (e.g. percentage and maturity of core balances on accounts and pass-through rate) and the measures using contractual terms rather than behavioural assumptions to isolate the impact of assumptions on both economic value and earnings.
• (i) Undertake stress testing to understand the sensitivity of the chosen risk measures to changes in key assumptions, taking the results of such tests into account in internal capital allocation decisions.

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