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“It all depends on expert opinion, data, and common sense”

Two ING experts share their views on deposit modelling

The low interest rate environment has faced banks with structural changes in customer behavior and converging products such as savings and current accounts. ING, one of Europe’s largest players in the savings market and a long-term client of Zanders, has positioned itself as one of the frontrunners in this environment. We sat down with Tom Tschirner (head of market risk at ING Germany) and Maarten Hummel (financial risk officer at ING Group) to gather their view on modeling and balance sheet management after these structural shifts.

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Incubating innovation

Thanks to exponential technological developments, the world is becoming increasingly connected and accessible, in the broadest sense of the word. This is why running nearly any type of business has become more complex and requires a deeper expertise than ever before. Irrespective of its core business, companies need more expertise in the areas of finance, legal, tax, marketing, IT, as well as treasury and risk. This is all the more reason for Zanders to continuously develop new innovative services and solutions with which we can lend companies a helping hand.

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Replicating investment portfolios

Many banks use a framework of replicating investment portfolios to measure and manage the interest rate risk of variable savings deposits. There are two commonly used methodologies, known as the marginal investment strategy and the portfolio investment strategy. While these have the same objective, the effects for margin and interest maturity may vary. We review these strategies on the basis of a quantitative and a qualitative analysis.

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The freedom of variable savings

The interest expenses on variable savings are an important driver for a bank’s results. Unlike mortgage interest rates, for instance, there is no knowing when and to what degree the variable savings interest rate will be adjusted. The bank has the right to change this at any time. But how much freedom does the bank really have in this respect?

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Approaches to modeling liquidity maturity

Savings and liquidity

Savers who place their cash in deposit accounts – and can withdraw the funds from their account at any time – are thus able to decide the liquidity profile of this important source of funding for banks. This is a very important consideration for bank risk managers. In an article about savings in the previous edition of Zanders Magazine, we showed that banks must include adequate modeling of the liquidity maturity as part of their integral liquidity management. But how should this modeling be approached?

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