slike bài giảng quản trị ngân hàng chương 3 managing and pricing deposit services

William Chittenden edited and updated the PowerPoint slides for this edition.
MANAGING AND PRICING
DEPOSIT SERVICES
Chapter 3
Key topics
•
1. Types of deposit accounts offered
•
2. The changing mix of deposits and deposit
costs
•
3. Pricing deposit services and deposit interest
rates
•
4. Conditional deposit pricing
•
5. Rules for deposit insurance coverage
•
6. Disclosure of deposit terms
•
7. Lifeline banking
12-2
Key issues depository institutions are faced
with
1. Where can funds be raised at lowest possible
cost?
2. How can management ensure that there are
enough deposits to support lending and other
services the public demands?
12-3
Types of deposit accounts


Transaction (payment or demand) deposits

Making payment on behalf of customers

One of the oldest services

Provider is required to honor any withdrawals
immediately

Non-transaction (savings or thrift) deposits

Longer-term

Higher interest rates than transaction deposits

Generally less costly to process and manage
12-4
Transaction accounts

Although the interest cost of transaction
accounts is very low, the non-interest costs can
be quite high

Generally, low balance checking accounts are
not profitable for banks due to the high cost of
processing checks
Transaction accounts

Most banks offer three different transaction

accounts

Demand deposits

DDAs (Demand Deposit Accounts)

Negotiable Order of Withdrawal

NOWs

Automatic Transfers from Savings

ATS
Types of transaction deposits
•
Noninterest-bearing demand deposits

Interest was prohibited by Glass-Steagall Act

One of the most volatile and unpredictable
sources of funds

Most deposits are held by business firms since
Regulation Q prohibits banks from paying explicit
interest on for-profit corporate checking accounts
12-7
Regulation Q: />Transaction accounts
Interest-bearing demand deposits with limited or no
check-writing privileges


Negotiable Orders of Withdrawal (NOW)- hybrid
savings instrument – pay interest

ATS (Automatic Transfers) Accounts

Customer has both a DDA and savings account

The bank transfers enough from savings to DDA
each day to force a zero balance in the DDA
account

For-profit corporations are prohibited from owning
NOW and ATS accounts
Transaction accounts

Money market deposit accounts

Short-maturity deposit (a few days, weeks, months)

Pay interest but holders are limited to 6 transactions
per month, of which only three can be checks

Attractive to banks because they are not required to
hold reserves against MMDAs

Held by both individuals and businesses
Non-transaction (savings or thrift) deposit
An account whose primary purpose is to
encourage the bank customer to save rather
than make payments.

12-10
Non-transaction accounts

Savings accounts: Have no fixed maturity

Denomination from $5

Withdrawal privileges are limited, but without prior notice

Stable fund to banks with little interest rate sensitivity

Low interest rate

For individuals, non-profit organization, businesses,
governments (firms cannot put > $150,000 in saving
deposits)

In form of

Passbook savings account

Statement savings account
Non-transaction accounts

Time deposits (CD is most popular type): Have a
specified maturity ranging from 7 days on up

Large time deposits (Jumbo CDs):

for corporation & wealthy individuals


in negotiable form CDs of $100,000-plus

Typically can be traded in the secondary market
many times before reaching maturity

Small time deposits (Jumbo CDs):

Usually acquired by individuals

nonnegotiable form CDs with smaller denomination

Cannot be traded before reaching maturity
Popular types of CDs
•
Bump-up CD – allows a depositor to switch to a
higher interest rate if market rates rise
•
Step-up CD – permits periodic upward
adjustments in the promised interest rate
•
Liquid CD – permits the depositor to withdraw
some or all of their funds without a withdrawal
penalty
12-13
Non-transaction accounts

Retirement savings deposits

Individual Retirement Account (IRA) - the

Economic Recovery Tax Act of1981

Keogh Deposit – have tax benefits

Roth IRA – The Tax Relief Act of 1997 allows
non-tax-deductible contributions

Default Option Retirement Plans – The Pension
Protection Act of 2006
12-14
Non-transaction accounts

Individual Retirement Accounts

Each year, a wage earner can make a tax-
deferred investment up to $3,000 of earned
income

Funds withdrawn before age 59 ½ are subject to
a 10% IRS penalty

This makes IRAs an attractive source of long-
term funding for banks
Interest rates on deposits depend on:

The maturity of the deposit

The size of the offering institution

The risk of the offering institution


Marketing philosophy and goals of the offering
institution
12-16
The changing composition of deposits in the US
12-17
* Saving deposits include MMDAs
Core deposits
A stable base of funds that is not highly
sensitive to movements in market interest rates
(low interest-rate elasticity) and which tend to
remain with the bank.
12-18
Core deposits

A large proportion includes transaction deposits and
low-yielding time & savings deposits.

Small time and savings deposits can be withdrawn
immediately, their effective maturity spans over years

Increase bank’s liability duration and reduce interest
rate vulnerability

Share in total deposits in small banks (80%) higher
than in large banks (63%) (FDIC: 2007)

Declining trend due to inflation, deregulation, stiff
competition and better educated-customers.
12-19

Holders of deposits

Private sector: individuals, partnership and
corporation (75%)

State and local government (4%)

Foreign governments, businesses, individuals,
mostly in off-shore offices

Other financial institutions (correspondent deposits)
Cost of deposits

Checkable deposits (checking accounts, special
checkbook deposits and interest-bearing checking
accounts)

Thrift deposits (money market accounts, time
deposits and savings accounts)

Business transaction accounts are more
profitable than personal checking accounts

Deposits are determined by public preferences
and competition
Cost and revenue accounting data for
deposit accounts at FirstBank
Check 21 and substitute checks

Effective October 28,2004 – permits depository

institutions to electronically transfer check images

The images are called substitute checks and is a
legal copy of the check

Protects depositors against loss

Benefits institutions by reducing the cost of check
clearing

Substitute checks can be sent electronically instead
of sending bundles of checks

More information:
12-23
Substitute check authorized by Check 21
FDIC insurance coverage

Banks insured through Bank Insurance Fund (BIF)

Savings and loans insured through Savings
Association Insurance Fund (SAIF)

Covers only those deposits payable in the U.S.

Many types of accounts are covered up to $100,000
(increased to $250,000 until year-end 2009 by the
Emergency Economic Stabilization Act of 2008) for
each account holder within the same bank (even if
different branches)


Deposits placed in separate institutions are insured
separately
12-25