PASS-THROUGH RATE STUDY FOR HONG KONG BANKING INDUSTRY AND ITS APPLICATION TO NONMATURITY DEPOSITS INTEREST RATE RISK MANAGEMENT

Zhifeng Wang, Fangying Wei () and Yuzhou Fang ()
Additional contact information
Zhifeng Wang: Risk Management Department, Bank of China (Hong Kong), 1 Garden Road, Central, Hong Kong
Fangying Wei: Risk Management Department, Bank of China (Hong Kong), 1 Garden Road, Central, Hong Kong
Yuzhou Fang: Risk Management Department, Bank of China (Hong Kong), 1 Garden Road, Central, Hong Kong

Annals of Financial Economics (AFE), 2019, vol. 14, issue 02, 1-25

Abstract: Basel Committee on Banking Supervision published Standards on Interest Rate Risk in Banking Book in April 2016. Apart from others, it proposed a standardized framework under which banks should identify core and noncore deposits within their stable nonmaturity deposits (NMD) and determine appropriate cash flow slotting for the NMD. This paper proposed a unique solution to slot Core NMD into repricing time buckets to address Basel requirements on NMD. The proposed solution was based on pass-through rate model under ECM (error correction model) framework. The solution itself showed interesting mathematical property to form a generalized Fibonacci sequence with converged partial sum. What is more, this paper proposed a model-neutral back testing scheme to make objective comparison of performance across different NMD repricing behavior models. The contents of this paper are expected to be useful for practitioners due to lack of quantitative modeling and model validation methodologies on this topic in the industry while, at the same time, to motivate academic discussion on the best practice and further enhancement of the modeling approach for the industry.

Keywords: Hong Kong bank savings rate; interest pass-through rate; nonmaturity deposits (NMD) repricing behavior model; interest rate risk in banking book (IRRBB); error correction model (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S201049521950009X
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:afexxx:v:14:y:2019:i:02:n:s201049521950009x

Ordering information: This journal article can be ordered from

DOI: 10.1142/S201049521950009X

Access Statistics for this article

Annals of Financial Economics (AFE) is currently edited by Michael McAleer

More articles in Annals of Financial Economics (AFE) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().