Modelling Non-Maturing Deposits: Examining the Impact of Repo Rates and Volume Dynamics on Valuation Using Regression, Time Series Analysis, and Vasicek Methods

Abstract: This thesis focuses on modelling non-maturing deposits (NMD) and has been written in collaboration with Svenska Handelsbanken. The methodology includes regression analysis and time series analysis, with the Repo rate serving as an exogenous variable in both models. A Vasicek model is employed to generate future Repo rates, which are then used as inputs for forecasting the NMD volume. These simulated rates are then compared to forecasted Repo rates with discrete changes from an external source. The results are utilised to analyze how net interest income can vary in the case of constant volume and in the case of interest rate-dependent volume. Effective liquidity management is crucial for banks, and NMDs are an important source of funding. By using regression analysis and time series analysis, combined with the Repo rate as the exogenous variable, this thesis provides insights into the behaviour of NMD volumes, and how it is affected by the Repo rate. The models also enable the forecasting of future trends based on future Repo rates. Additionally, by using different data sets as input for future Repo rates, the behaviour of the model can be evaluated based on how well it coincides with reality. The results obtained from this analysis can also be used to compare the value and interest rate sensitivity of NMD products. In conclusion, this thesis provides an approach to modelling the NMD volumes using exogenous factors and demonstrates how this can affect the net interest income from deposit volumes.