CHAP_03_Managing and Pricing deposit services

CHAP_03_Managing and Pricing deposit services - William...

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Unformatted text preview: 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: http://www.bankersonline.com/regs/217/217-3.html 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....
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This note was uploaded on 05/23/2011 for the course FIN 360 taught by Professor Mcgill during the Spring '11 term at Neumann.

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CHAP_03_Managing and Pricing deposit services - William...

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