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

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: http://www.bankersonline.com/regs/217/217-3.html
Transaction accounts
Interest-bearing demand deposits with limited or no
check-writing privileges

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):


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
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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Funds withdrawn before age 59 ½ are subject to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


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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


different branches)

Deposits placed in separate institutions are insured
separately
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