Effects of Interest Rate Induced Changes in Bank Deposit Structure on Performance and Risk, With Practical Application Utilizing SS&C Algorithmics ALM

The recent surge of inflation and consequential dramatic interest rate increases by global central banks have manifold effects on banks’ traditional deposit-based funding sources. Along this line, a recent study on the deposit structure in Germany and Austria is extended to very different European economies where publicly available volume and pricing time series data for non-maturing deposits and term deposits are examined. In many national economies, a very market-driven deposit structure has been found but some rather static deposit markets have been revealed as well, underlying the very specific nature of customer behavior. A practical approach is taken to the application of the derived allocation model within a dynamic balance sheet simulation within SS&C Algorithmics ALM. This model, in conjunction with several market scenarios, highlights the importance of a proper modeling of a market-driven deposit structure and its impact on key IRRBB risk metrics figures, namely net interest income (NII) and economic value of equity (EVE).