Improving usefulness of PPNR CCAR stress test models: Adding 30+ years of rate data to deposit balance models

Improving usefulness of PPNR CCAR stress test models: Adding 30+ years of rate data to deposit balance models

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In expectation of eventual rising rates, PPNR modeling teams are searching for analytic insights on how deposit balances will behave when rates rise. But given the extremely low interest rates lasting most of a decade, many banks lack sufficiently long internal monthly history on their own deposit balances and rates at the necessary level of granularity to build PPNR models beyond a single rate cycle. To address this data shortcoming, Novantas uses as a rate proxy the time deposit share of total interest-bearing deposit balances (“CD-Share”) as an independent industry variable in many deposit balance models. We develop forecasts of CD-Share using multi-decade industry history, adding decades of important rate sensitivity to deposit models that otherwise can only be trained on the ultra-low interest rates of the late-2000s to present. In this Perspective, we define CD-Share, explore how to build forecasts for this measure, and describe how CD-Share can improve deposit balance modeling performance.

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Read the full white paper here


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