Nonmaturity Deposits and Banks’ Exposure to Interest Rate Risk: Issues Arising from the Basel Regulatory Framework

36 Pages Posted: 24 Jun 2016

See all articles by Rosa Cocozza

Rosa Cocozza

University of Naples Federico II - Faculty of Economics

Domenico Curcio

University of Naples Federico II; Arcelli Centre for Monetary and Financial Studies (CASMEF)

Igor Gianfrancesco

Banco di Desio e della Brianza

Date Written: May 18, 2015

Abstract

Because publicly available measures of deposit runoff risk are scarce, regulators' models to measure interest rate risk in the banking book are based on very coarse assumptions about the allocation of non-maturity deposits within the regulatory maturity ladder. Using well-established statistical approaches, we address this issue by developing a methodology that considers deposits' actual behavior in terms of both price sensitivity to changes in market rates and volume stability over time. Our model extends the current knowledge of public measures of interest rate risk and can be applied to publicly available data in a manner replicable by those outside of banking institutions. The use of different allocation criteria affects not only the size of the risk indicator but also the nature of banks' risk exposure and determines the risk inversion phenomenon, that is, banks exposed to an increase in interest rates can experience a reduction in their equity economic value if interest rates decrease. Overall, our results confirm the importance of accurate modeling of non-maturity deposits for estimating interest rate risk in the banking book.

Keywords: banks, interest rate risk, nonmaturity deposits, regulation, risk management

Suggested Citation

Cocozza, Rosa and Curcio, Domenico and Gianfrancesco, Igor, Nonmaturity Deposits and Banks’ Exposure to Interest Rate Risk: Issues Arising from the Basel Regulatory Framework (May 18, 2015). Journal of Risk, Vol. 17, No. 5, 2015, Available at SSRN: https://ssrn.com/abstract=2799689

Rosa Cocozza

University of Naples Federico II - Faculty of Economics ( email )

Via Cintia Monte S. Angelo
Napoli, 80126
Italy
+39/81675083 (Phone)

HOME PAGE: http://www.docenti.unina.it/rosa.cocozza

Domenico Curcio (Contact Author)

University of Naples Federico II ( email )

Via Cintia, Monte S. Angelo
Naples, Naples 80126
Italy
+393402651322 (Phone)

Arcelli Centre for Monetary and Financial Studies (CASMEF) ( email )

Viale Romania 32
Rome, 00197
Italy

Igor Gianfrancesco

Banco di Desio e della Brianza ( email )

Via E. Rovagnati 1
Desio, 20832
Italy

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