Managing Interest Rate Risk for Non-Maturity Deposits

Marije Elkenbracht-Huizing and Bert-Jan Nauta

For many banks, non-maturity deposits represent a significant part of funding. However, there is still no commonly accepted approach to managing such deposits’ interest rate risk. We introduce two dynamic hedge strategies to stabilise the margin between investment return and client coupon. As extensions of Jarrow and van Deventer’s (1998) model, these strategies can be used for both interest rate risk management and funds transfer pricing.

An important goal in modelling non-maturity deposits¹¹This chapter concerns deposit account types that lack a contractual maturity date. Examples are demand deposits, transaction deposits, negotiable order of withdrawal accounts, savings and money market deposit accounts. is to find an investment strategy²²In this chapter the resulting investment portfolio is an imaginary portfolio, which is used to replace the non-maturity deposits at the liability side of the balance sheet for interest rate risk management. On the asset side the “real” investment portfolio is used, consisting of, eg, the loans the bank has originated. that stabilises the margin independently of interest rate movements. Sales departments prefer a stable margin to help them