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Pass-Through Rate Study For Hong Kong Banking Industry And Its Application To Nonmaturity Deposits Interest Rate Risk Management

Author

Listed:
  • 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)

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.

Suggested Citation

  • Zhifeng Wang & Fangying Wei & Yuzhou Fang, 2019. "Pass-Through Rate Study For Hong Kong Banking Industry And Its Application To Nonmaturity Deposits Interest Rate Risk Management," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 14(02), pages 1-25, June.
    • Handle: RePEc:wsi:afexxx:v:14:y:2019:i:02:n:s201049521950009x
    DOI: 10.1142/S201049521950009X
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    Cited by:

    1. Milan Fičura & Jiří Witzany, . "Determinants of Non-maturing Deposit Pass-through Rates in Eurozone Countries," Politická ekonomie, Prague University of Economics and Business, vol. 0.
    2. Milan Fičura & Jiří Witzany, 2023. "Determinants of Non-maturing Deposit Pass-through Rates in Eurozone Countries," Politická ekonomie, Prague University of Economics and Business, vol. 2023(3), pages 291-318.
    3. Milan Fičura & Jiří Witzany, 2021. "Determinants of NMD Pass-Through Rates in Eurozone Countries," FFA Working Papers 4.004, Prague University of Economics and Business, revised 11 Mar 2022.

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