Stable and Floating Balance Assumptions for Deposit FTP

Summary

The document describes a stable-floating approach for modeling non-maturing deposits (NMDs) in fund transfer pricing. It divides balances into a core portion with a longer assigned maturity and a non-core portion treated as short-term funding. The example assigns the floating balance a one-month maturity and reprices one-twelfth of the stable balance each month over a one-year horizon.

The model is presented as a way to assess the deposit unit’s performance against an internal funding rate. The discussion does not provide evidence for the example’s maturity or balance assumptions; instead, it questions whether they are arbitrary. It also raises a practical identification problem: observed balances may keep growing, making actual withdrawals and runoff difficult to isolate. The document therefore introduces the framework and its unresolved calibration questions, rather than offering a validated method for setting the portions or maturities.

Key ideas

• Non-maturing deposits have no contractual maturity and may remain sticky as rates change.
• The stable-floating approach splits balances into core and non-core portions for FTP.
• The example treats the non-core portion as short-term and reprices the core portion gradually.
• The document questions how to calibrate the split and maturity assumptions when balances keep changing.

Tags

# "Stable-Floating" model for non-maturing deposit for FTP purpose


# "Stable-Floating" model for non-maturing deposit for FTP purpose












Non-maturing deposits (NMD) is a deposit without maturity date. The deposit rate is normally low. Banks could adjust the rate at any time. The customer can withdraw without penalty, however, in real life, the deposit is observed to be "sticky" when LIBOR rate changes.

Now, how shall such NMD amount be modeled for Fund Transfer Pricing (FTP) purpose?

FTP measures the performance of a unit. If the internal funding cost is set as 3 months LIBOR rate, and deposit department could encourage people to put 3 months fixed deposit with (LIBOR rate - 1%) rate, their performance is 1%.

There's a "Stable - Floating parts model" for the NMD deposits: The NMD is divided into 2 parts, a Stable Part, considered as "core balance" and a Floating Part as "non-core balance". The Floating Part is seen as volatile and assumed a very short maturity, e.g. 1 month; while the Stable Part is assigned a longer maturity, e.g. 1 year, and each month, 1/12 of the core part would be considered re-priced.

The assumptions seem too arbitrary to me: why the Floating Part is assumed to be withdrawn in 1 month's time? Why the Stable Part is estimated to run-off in 1 year? And how to decide each part has how big a portion? In real life the NMD amount keep rising, we can't observe a "real" withdraw.

I'm a bit lost now, any ideas please?

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.