Non-dated liabilities

Paul Newson

The previous chapter discussed issues surrounding items on a typical bank’s balance sheet where there can be considerable uncertainty about when and how they might re-price in response to a change in the general level of interest rates. This chapter continues that discussion but with reference specifically to those liability items that potentially may never re-price, and consequently give rise to slightly different challenges. These comprise equity and also what are termed “non-maturing deposits” (NMDs) – principally, current accounts and rate-insensitive savings, both of which contractually are repayable on demand.

As will be shown, it is not simply a case of making an assumption about re-pricing, hedging to that assumption and then accepting risk to the extent that this assumption proves to be wrong. Rather, it also involves what is effectively an investment as well as a hedging decision. For items such as fixed rate loans and deposits, a bank that was 100% accurate in its assumptions could make itself totally immune from interest rate risk because the items concerned definitely will re-price at some point. NMDs, on the other hand, may not; therefore, given that the funds