Chapter4:

Deposit ServicesI-Introduction-Deposits are raw material for bank to provide all others its services.-Without deposits, a bank would not be able to operate.-Both the payment function and the credit function depend on the deposit function.-Today’s payment function remains check-based, deposit the increased used of electronic funds transfer systems.

-The payment function could not exist without deposit.

-The company obtains the benefits of the deposit system.

-Bank customers can issue checks because they have already deposited the funds to cover those checks, and payee can accept them because they believe the items are good.

-Most of the funds loaned or invested by banks not come from the bank's resources about 90% of bank loans and investments are made by suing depositor’s funds.

-The deposit function serves the needs of both banks and their customers.

-It is impossible for the company to present each check for payment, instead, it deposits the checks with its own banks.

What are deposits?

One of the most important is to learn about the different types of deposits bank and their competitors offer and, from the perspective of a manager, to discover which types of deposits are among the most profitable to offer their customers.

It refers to a position taken by banks based on their belief that every check is good.

Check are not money, but they are claims to money. Every check is a demand draft drawn on a bank with written instructions directing that a payment be made.

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II-Transaction Deposit

One of the oldest services offered by banks and other depository institutions has centered on making payments on behalf of customers. An account used primarily to make payment for purchases of goods and services. There two types of transaction deposit

-Noninterest –Bearing Demand Deposit-Interest –Bearing Demand Deposit

Types of Transaction Deposits

-Noninterest –Bearing Demand Deposit:

The transaction deposit which do not earn an explicit interest payment but provide the customer with payment services, safekeeping of funds, and recordkeeping for any transaction carried out by check.

Interest –Bearing Demand Deposit:

Negotiable Orders of withdrawal (NOW)

Money Market Deposit Account (MMDA)

Super NOW account

III-Thrift or Saving Deposit

An account whose primary purpose is to encourage the Bank customer to save rather than make payments.

Some banks and thrifts offer statement saving deposits, evidenced only by computer entry. The customer can get monthly printouts showing deposits withdrawal interest earned, and the balance in the account.

Types of Saving or Thrift Deposit

Passbook Savings Account

Statement Saving Deposit Time Deposit Individual Retirement Account (IRA) Keogh Deposits

Roth IRA

IV-Marginal Interest rate on deposit

Many financial analysis would argue that added cost of bringing news funds into the bank should be used to price deposits.

Example of a commercial bank attempting to raise new funds:

Expected Amounts Average

Of Deposits that interest

Will flow in the bank will

pay on new funds

$25 7.0%

50 7.5

What change in total cost ?

What is marginal cost rate?

Change in total cost = new interest rate x Total funds raised at new rate – Old interest rate x Total funds raised at old rate.

Change in total cost

Magical Cost Rate =

Additional funds raised

Bank XYZ

Always offers you competitive CD RatesCertificate of Deposit Annual Percentage

5-year 6.31%

4-year 6.07%

3-year 5.72%

2-year 5.25%

1-year 4.54%

6-month 4.34%

90-day 4.21%

V-Deposits Based on

Factors in household and business customers’ choice of a bank for their deposit account.

1-in choosing a bank to hold their checking accounts Household consider:

convenient location

Availability of many other services.

Safe

Low fee and low minimum balance.

High deposit interest rate.

2-In choosing a bank to hold their saving deposits Household consider:

Familiarity.

Interest rate paid.

Transaction convenience.

Location

Availability of payroll deduction.

Fees charged

3-In choosing a bank to supply their deposits and others services Household consider:

Financial heath of lending institution.

whether bank will be a reliable source of credit in the future.

Quality of bank officers.

Whether loans are competitively price

Quality of financial advice given.

Whether cash management and operations services are provided.

The End of Chapter 4