Modeling Non-Maturity Deposit Risk: A Behavioral Framework for Interest Rate Stress

For banking institutions, managing interest rate risk in the banking book (IRRBB) requires more than just looking at contractual terms. While non-maturity deposits (NMDs) are technically floating-rate liabilities with no stated maturity, their actual behavior under market stress is far more complex. A new behavioral framework has been developed to model NMD withdrawal risk, providing a more granular approach to understanding how depositor behavior shifts during interest rate fluctuations.

The Challenge of NMD Stability in IRRBB

Non-maturity deposits represent a critical component of bank funding, yet they pose a unique challenge for risk management. Because these deposits lack a fixed maturity date, banks must rely on behavioral models to estimate when funds might be withdrawn. Traditionally, these models have often struggled to align with regulatory expectations, particularly when macroeconomic variables are held constant during interest rate shock scenarios.

The proposed behavioral framework addresses this by focusing on the probability of withdrawal events through a multivariate logistic regression model utilizing autocorrelated data. This approach moves away from treating deposit stability as a static, structural balance-sheet characteristic and instead views it as a dynamic, market-dependent outcome.

Aligning with Basel Supervisory Standards

A significant advancement in this modeling framework is its integration with international regulatory standards. By utilizing financial market variables that are directly consistent with the supervisory interest rate shock scenarios prescribed by the Basel Committee on Banking Supervision, the model ensures internal consistency.

This alignment is crucial for effective stress testing. By relying exclusively on “shockable” variables, the framework avoids the common misalignment that occurs when macroeconomic variables remain static while interest rate shocks are applied. This ensures that the behavioral estimates used for liquidity and interest rate risk management are in sync with the regulatory frameworks used for capital adequacy and stress testing.

Identifying the Primary Drivers of Withdrawal Risk

The empirical results of the framework highlight several key factors that dictate the stability of non-maturity deposits. Understanding these drivers allows banks to better predict funding volatility during periods of market turbulence.

• Short-Term Interest Rates: These serve as the primary driver of withdrawal risk. As short-term rates fluctuate, they trigger immediate shifts in depositor behavior.
• Yield Curve Slopes: Rather than acting as a primary driver, yield curve slopes function as amplifiers. They can intensify the response of depositors to changing interest rate environments.
• Regime-Dependent Factors: The model identifies that deposit stability is not uniform. Seasonal patterns and significant market disruptions—such as the Covid-19 crisis—demonstrate that withdrawal behavior is highly dependent on the prevailing economic regime.

Key Takeaways for Risk Managers

Conclusion

As interest rate environments become increasingly volatile, the ability to accurately predict NMD withdrawal behavior is paramount for financial stability. By adopting a behavioral framework that incorporates shockable market variables and recognizes the amplifying effects of yield curve slopes, banks can move toward a more forward-looking and practical tool for risk management. This integrated approach allows for more robust assessment of funding stability under various IRRBB stress scenarios.