Accounting of the Sight Deposit and Hedging

Luca Ingargiola

Financial institutions often receive a significant portion of their funding from sight deposits (also referred to as “demand” or “core” deposits, or simply “non-maturity deposits”, NMDs), such as current account balances, saving accounts and other accounts with a similar behaviour. Although the total balance from all such customer deposits may (and will) vary in any given time period, a financial institution typically determines a level of core deposits that, based on statistical analyses, are expected to be maintained for a particular period of time, and hence will behave for that period like a fixed interest rate exposure from an interest rate risk perspective.

Demand deposits therefore play an important role for commercial banks by representing a relatively reliable funding base as well as a stable source of income (they are generally remunerated below current market rates, sometimes even zero). At the same time, demand deposits are also often responsible for a significant part of the volatility of commercial banks’ profit and loss from both an economic and accounting perspective, and therefore are often hedged by means of interest rate derivatives.

However, financial