Non-maturing deposits such as checking and savings accounts are central to bank funding because they are paid back on demand but often remain with the bank, creating a low-cost funding source. Their relevance lies in the mismatch between contractual liquidity and behavioral persistence: depositors can withdraw at any time, yet balances often change slowly. That mismatch creates interest rate exposure for banks when market rates move faster than what they pass through to deposit rates. Causes include competition for deposits, changes in monetary policy, and shifts in household preferences. Consequences range from margin compression to liquidity stress and, in extreme cases, solvency challenges for banks that misestimate depositor behavior.
Hedging techniques
Banks combine accounting, market instruments, and product design to hedge exposure on non-maturing deposits. On the modeling side, institutions estimate a deposit beta to measure how much deposit rates move when market rates change; behavioral assumptions are critical and determine the implied effective duration of deposits. To transfer interest-rate sensitivity, banks use interest rate swaps to convert fixed-rate asset exposures into floating ones or vice versa, and they use futures and forward-rate agreements to lock in funding costs. Options and swaptions are used to protect against large rate moves. Empirical and practitioner literature on liability management supports these approaches, including discussion of derivatives use by Darrell Duffie Stanford Graduate School of Business and behavioral deposit analysis by Anil K. Kashyap University of Chicago Booth. Banks also manage on the asset side by shifting into shorter-duration securities or holding liquid reserves such as Treasuries.
Risk measurement and governance
Effective hedging requires integrated asset-liability management, stress testing, and governance. Banks run scenario analyses to capture deposit runoff under different rate and macroeconomic conditions and measure hedge effectiveness over time. Regulatory frameworks shape allowable strategies and capital implications, with guidance from the Basel Committee on Banking Supervision Bank for International Settlements and supervisory expectations from the Federal Reserve Board and the Federal Deposit Insurance Corporation on liquidity and interest-rate risk. Cultural and territorial nuances matter: deposit stickiness varies by country and by the presence of deposit insurance, changing the optimal hedge. Poorly specified behavioral models can leave banks exposed to rapid outflows or unexpected margin loss, while disciplined hedging and transparent governance reduce the risk that rate shocks translate into systemic stress.