Romy Mieras

Triple A – Risk Finance

on-maturing deposit valuation in present-day interest rate environments

Non-maturing deposits (NMDs), such as transaction or savings accounts, form one of the core parts of banking practice. However, they are hard to manage for banks since they are characterized by the fact that depositors have the right to withdraw their funds at any point in time. Besides that, the deposit rate depends on stochastic market rates. In my MSc thesis I investigated the effects of the negative interest rate environment in the Euro area on the valuation of NMDs.

However, the current rising interest rate environment also poses new and interesting challenges for valuing NMDs. To value the NMDs, models for the term structure of market rates, deposit volumes, and deposit rates have to be established. In my MSc thesis I set up a state-space non-maturing deposit (SS-NMD) model, which merges the term-structure, deposit volume, and deposit rate models into one state-space model. This state-space model allows for simultaneous estimation of the term-structure, deposit volume, and deposit rate model. In the negative interest rate environment, I find that using specific lower bound models for the term structure model and the deposit rate model are crucial while valuing NMDs.

But what does this mean in a rising interest rate environment? Banks usually adjust their deposit rates asymmetrically to increasing and decreasing market rates. Hence, the market rates have increased, but the deposit rates are still at low levels. We will look at NMD economic values in present-day interest rate environments, using a no-arbitrage Monte Carlo simulation study.