BFS 2002

Contributed Talk

Risk management of non-maturing liabilities is a relatively unstudied issue of significant practical importance. Non-maturing liabilities include most of the traditional deposit accounts like demand deposits, savings accounts and short time deposits and form the basis of the funding of depository institutions.
In this talk we propose a stochastic three-factor model as general quantitative framework for liquidity risk and interest rate risk management for non-maturing liabilities. It consists of three building blocks: market rates, deposit rates and deposit volumes. Our approach to liquidity risk management is based on the term structure of liquidity, a concept which forecasts for a specified period and probability what amount of cash is available for investment. For interest rate risk management we compute the value, the risk profile and the replicating bond portfolio of non-maturing liabilities using arbitrage-free pricing.