When NMD management unravels

Traditional banking business models rely on creating short-term liabilities via deposits and funding, and investing in long-term assets to make profits.

The Silicon Valley Bank (SVB) was no different. What mattered most was a strong, robust asset liability management (ALM) framework that manages the risks emanating from dynamic interest rate environments, fluctuating deposit volumes, and changing investment profiles.

The collapse of SVB and other regional banks such as Signature highlights how porous risk-management processes and weak modeling, especially for non-maturity deposits (NMDs), can wreak destruction.

This whitepaper discusses the key elements of interest rate risk in banking book (IRRBB), best practices in ALM, and regulatory expectations for the banking industry, specifically in the context of non-maturing deposits (NMDs).

NMDs are a key source of funding for banks that must be dealt with at a granular level, from a risk-management perspective. As NMDs can be withdrawn at any time, banks must carefully manage their liquidity to address depositors’ demands.