Replicating Portfolio Approach

  • Title : Replicating Portfolio Approach to Determine the Duration of Non-Maturing Liabilities: Case Study
  • Authors : Wim Konings and François Ducuroir
  • Date : 18 June 2014
  • Reference : Reacfin White Paper 2014
  • Key words : Retail Banking - Non-maturing liabilities - Portfolio

Non-maturing liabilities (such as saving accounts and current accounts) are a major source of funding for many retail banks and a much envied source of liquidity for their Commercial- or Investment-banking peers. Yet characterizing, quantifying and ultimately hedging the interest rate risks of such instruments has, for long, proven quite challenging. In this paper we illustrate how a replicating portfolio approach can offer a pragmatic solution to address this point. In addition a practical case study is presented based on the average base rate on Belgian regulated saving accounts. The results suggest that historically some banks making over-simplistic assumptions may have ended-up not only making materially less margins but also have increased the volatility of such margin and hence their related interest-rate risks.Wim Konings and François Ducuroir