In the last decade, the world economy faced a global saving glut problem, in which economic agents keep saving even in negative real rates. This situation leads to excess demand for safe assets (US Treasuries), lowering bond yields, and peaking equity valuations. The 2008 financial crisis and the Great Recession reinforced the rise in global savings, though incremental accumulation has been concentrated in Europe, the U.S. and other advanced economies.
Non-Maturity Deposits (NMDs) are the main part of the banks' funding, and they are a natural hedge of the balance sheet since saving accounts are more stable and sticky in terms of volume and price. As explained above, the banks' deposit base has increased more than expected due to world economic history's most significant fiscal and monetary measures. Therefore, one of the major components of the modeling NMDs is the volume model, which estimates a run-down liquidity profile. However, the savings accumulation disrupts the run-down profile, which causes several challenges to measuring and managing the institutions' interest rate, liquidity risk and funds transfer pricing mechanism.
NMD modeling is an essential activity and has different impacts on different functions in the bank. For risk management, it attempts to measure interest rate and liquidity risk accurately. From a treasury perspective, it enables hedge and position planning. Lastly, for finance, it is essential for earnings forecasts and simulations.