12 3 How has the composition of deposits changed in recent years There has been

12 3 how has the composition of deposits changed in

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relatively low interest-rate risk. 12-3. How has the composition of deposits changed in recent years? There has been a shift in the public’s holdings of deposits toward greater relative proportions of the highest-yielding time deposits and toward hybrid accounts that maximize depositor returns, while still giving them access to deposited funds to make payments. 12-4. What are the consequences for the management and performance of depository institutions resulting from recent changes in deposit composition? While depository institutions would prefer to sell only the cheapest deposits to the public, it is predominately public preference that determines which types of deposits will be created. Institutions that do not wish to conform to customer preferences will simply be outbid for deposits by those who do. Managers who fail to stay abreast of changes in their competitors’ deposit pricing and marketing programs stand to lose both customers and profits. 12-5. Which deposits are the least costly for depository institutions? The most costly? Commercial checkable deposits, particularly regular noninterest bearing demand deposits, are usually the least costly. The most costly deposits are passbook savings accounts having substantial deposit and withdrawal activity and higher interest-rate time deposits. 12-6. Describe the essential differences between the following deposit pricing methods in use today: cost-plus pricing, conditional pricing, and relationship pricing. Cost-plus deposit pricing encourages banks to determine what costs they are incurring in labor and management time, materials, etc., in offering each deposit service. Cost-plus pricing generally calls for a bank to charge deposit service fees adequate to cover all the costs of offering the service plus a small margin for profit. Conditional pricing is used today as a tool by banks to attract the kinds of depositors they want to have as customers. With this pricing technique a bank will post a schedule of offered interest rates or fees assessed for deposits of varying sizes and based on account activity. Generally larger volume deposits carry higher interest returns to the depositor or are assessed lower service charges, encouraging customers to hold a high average deposit balance which gives the bank more funds to invest in earning assets. Finally, relationship pricing involves basing fees charged a customer on the number of services and the intensity of use of services the customer purchases from a bank. 12-8. To price deposits successfully, service providers must know their costs. How are these costs determined using the historical average cost approach? The marginal cost of funds approach? What are the advantages and disadvantages of each approach? The historical average cost approach looks at the past. It asks the following question: What funds has the bank raised to date and what did they cost? The marginal cost deposit-pricing method focuses upon the weighted average cost of new funds raised from all of the different sources of funds the bank draws upon or plans to draw upon in the current period.
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  • Fall '16
  • Thu Trang
  • Debt, Financial services, Mortgage loan, Deposit account

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