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Submit Search. Successfully reported this slideshow. We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime. Modeling Non Maturity Deposits. Upcoming SlideShare. Like this presentation? Why not share! An Introduction to non-Maturity Dep How to Link Scenari Embed Size px.
Start on. Show related SlideShares at end. WordPress Shortcode. Moody's Analytics Follow. Published in: Full Name Comment goes here. Are you sure you want to Yes No. Matilda Norris Your opinions matter! Adam Grainger , M. Amanda Zhou , Sr. Specialist Interest Rate Risk. Show More. No Downloads. Views Total views. Actions Shares. Embeds 0 No embeds. No notes for slide. Modeling Non Maturity Deposits 1. Linkages between deposit valuation, interest rate risk, and FTP2 3.
All of these banks must file FDIC callreports. Therefore, banks can construct stress testing scenarios basedon publicly available time series data. Whereas, fixed rate liability positions CDs gain in value in rising ratesand decline in value in falling rates. Duration in this context does not simply mean average life, butrather refers to the change in the market value of an asset or liability for a changein interest rates, more specifically for a parallel shock in the yield curve.
Floating rate instruments havedurations that are limited to the reset period of the index rate, providedthey do not contain embedded caps, floors, or other rate provisions. The resulting exposure is then hedged to be within policy limitsby the derivative portfolio. In these cases the asset or liability isinstitution specific.
This is either due to unique contractual features orspecific customer preferences and behavior. Furthermore,evaluating account specific institution behavior is necessary if productstrategy is shifting over time or is likely to shift in the future. Thediscounted present value of these cash flows against the currentcurve generates the market value. Thisincludes both attrition and churn.
For a given correlation to marketrates, high retention will result in higher duration. May 12, Estimated Duration SensitivityRetention How do IcharacterizeNMDmaturities? You really want to have more, like aDec 31 to Jan 31, Nov 30 to Dec 31, etc. May 12, Intro to FTP: However, financial institutions are managed based on accrual income.
Therefore, FTP is the link through which a market-based financial riskmanagement system is translated into financial incentives for large and diverseorganizations rooted in financial accounting systems. As such, the FTPconcept is fraught with controversy since it is used to benchmark performance. Borrowers from the book feel rates are toohigh and lenders to the book feel rates are too low. If large interest rate riskpositions are taken within the book in an attempt to make profits, any resultinggains or losses will reinforce the suspicions of line units.
If there are losses, the transfer pricing bookmanager will be regarded as incompetent. May 12, Why do we need Funds Transfer Pricing? Itis a critical component of the profitability measurement process, as it allocates the majorcontributor to profitability, net interest margin. Specifically, FTP allows a Bank to: Funds are assigned to one or more pools created under a pre-defined set of criteria.
Criteria for pool classification may be based on type, term,repricing term, origination, or other fund attributes. The transfer rate assigned toindividual pools is derived either internally, based on actual rates earned or paid, oralternatively, by market-derived interest rates. Matched-term methods assign unique transferrates to each source and use of funds at the time of origination.
That is, one can modelany stream of cash flows with a portfolio of zero coupon bonds. Therefore, one canvalue that stream of cash flows by adding together the market values of each of thecomponent zero coupon instruments. Similarly, if each cash flow of an instrument werematch funded at the prevailing cost of funds, the discounted cash flow of the constituentstrip of zero coupons should equal the price of the instrument. Therefore,the transfer spread, in this context, is defined as the economic profit in basis pointsabove the cost of funding.
This is accomplished by generating arbitrage free random interest rate paths and solvingfor the average transfer spread that equates the price at origination with the sum of theaverage discounted cash flows. Stochastic strip funding is typically used for instrumentswith embedded options like mortgages. May 12, Other FTP MethodsThere are many other different types of transfer pricing methodologies usedaround the world besides strip funding.
Funds Target. Sep 4 mo. ContributionJan mo. FTP rate: A good rule of thumb is to use an FTCthat is consistent with how funds on the asset side of the balance sheet were invested. The single point on the swap curve chosen for the FTC in this method corresponds tothe current duration assumption per product or tier. This moving average is rolledforward over an assumed weighted average life equal to twice the existing duration perproduct category or tier.
This growing average isthen rolled forward using the same methodology. The core balance can be estimated using a number ofapproaches. The volatile balance is calculated as the difference between the monthend balance and the core balance. The volatile balance is credited using a short termindex i. The term of themoving average should correspond to the product level or tier level depositduration. The point on the yield curve used to calculate the moving averageshould correspond to the duration as well.
The core balance can be estimatedusing a number of approaches. The volatile balance is calculated as thedifference between the month end balance and the core balance. The volatilebalance is credited using a short term index i. Therefore, it is possible to game this framework. However, it is harderto game because it uses current spot rates to approximate the FTCfor new vintages.
May 12, The End56Robert. Wyle Moodys. You just clipped your first slide! Clipping is a handy way to collect important slides you want to go back to later. Now customize the name of a clipboard to store your clips. Visibility Others can see my Clipboard. Cancel Save.
Macaulay duration The earliest form of duration measurement. Developed in by Professor Frederick Macaulay, this simple form of duration provides only an approximate measure of the true price volatility and interest rate sensitivity of an instrument. See convexity, duration, effective duration and modified duration. As opposed to micro hedging a single instrument.
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Early amortization event A type of credit enhancement used in asset backed securities. Once triggered, the early amortization provision requires that the monthly principal payments be distributed to investors as they are received. The most common trigger is a measure of how the portfolio yield net of charge-offs exceeds the base rate of servicing plus the investor coupon rate. Also called a payout event. Earnings at risk EAR The quantity by which net income is projected to decline in the event of an adverse change in prevailing interest rates. See value at risk VAR for an alternative measure. Earnings credit rate An interest rate applied to investable account balances to determine how much expense for bank services used by a depositor is offset by the deposits maintained by that depositor. The same calculation can work in the opposite way by applying the earnings credit rate to the actual service charges to determine how much deposit balance is needed to pay for the charges. The earnings credit rate is always expressed as an annual rate even though the calculations are usually done monthly.
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