The Literature on NMD Behavioural Models

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Non-maturity deposits (NMDs) are banking products whose main features are the right of the clients to withdraw their balances without any notice and the possibility of the bank modifying unilaterally the rate paid on the account. From a contractual point of view, therefore, NMDs have no contractual maturity and a time-varying interest rate. Typically, NMDs represent a high fraction of the liabilities of commercial banks since they constitute a cheap funding source; indeed, the rate paid on NMDs is kept low, usually below short-term market rates, as sight deposits can be viewed, at least theoretically, as overnight products.

In practice, NMDs present a certain stickiness that makes them eligible for longer maturity investments. The rationale beyond the investment of deposits on the market is an attempt by the bank to earn a positive margin from the differential between the market and the client rate. In deposit management, the need to stabilise or increase the interest rate margin has to be balanced with the necessity of keeping the liquidity and interest rate risk under control.

To make this clearer, in a situation where there is a positive sloping market interest rate curve