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Modeling Deposit Portfolio Rates

Combining Replicating Portfolio Concepts with Regression Analysis to Improve PPNR Stress Testing and ALM Accuracy

PPNR and ALM modeling teams know firsthand that the bar for deposit rate modeling has risen. Thanks to its criticality for projecting NII in rising (and falling) rate environments, senior executives, model validation groups, and regulators are all kicking the tires of traditional deposit rate modeling techniques. In this Perspective, we explain the Novantas regression-based approach and compare its performance to beta and replicating portfolio techniques. The Old Solution: Betas A simple deposit beta (or “repricing beta”) measures the change in a portfolio rate as a percentage of the change in a single wholesale market interest rate. For example, a ...

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