Ch12 Deposits
Content
Clemson University
School of Accountancy and Finance
FIN 4080
Management of Financial Institutions
Dr. Lucy Chernykh
DEPOSIT MANAGEMENT
Outline
Liability management: Overview
Types of deposit accounts
Deposit pricing
Deposit insurance
Disclosure of deposit terms
Current trends
Liability Management
Key Issues in Deposits Management
1
Types of Deposit Accounts
Transaction (Payment or Demand) Deposits
Nontransaction (Savings or Thrift) Deposits
Types of Transaction Deposits
Noninterest-Bearing Demand Deposits
Interest-Bearing Demand Deposits
2
Types of Nontransaction Deposits
Core Deposits
Core deposits are stable deposits that are not highly interest rate-sensitive.
Interest Rates on Deposits Depend On:
3
Estimating the Marginal Cost of a Deposit Account
MCD =
I S DI
1 - RR
Where
I
= current market interest rate on type of deposit
S
= servicing costs of deposits (expressed as percentage of each dollar acquired)
DI = deposit insurance premium (expressed as percentage of each insured dollar)
RR = Fed reserve requirement of type of deposit
Example. Calculation of MCD
Current market interest rate on NOW account is 6.5%
Cost of servicing the NOW account is 3.4%
Deposit insurance premium is 0.254%
Fed reserve requirement is 10%
The marginal cost of a NOW account deposit is:
4
FDIC Insurance Coverage
FDIC is an independent agency of the US government that protects the funds depositors
place in banks and savings associations.
FDIC insurance covers all deposit accounts, including:
The insurance amount is $250,000 per depositor, per insured bank, for each account
ownership category.
Example 1: Single account
Account Title
Deposit Type
Account Balance
Mary Jones
MMDA
$15,000
Mary Jones
Savings
$20,000
Mary Jones
CD
Mary's Memories
(A Sole Proprietorship)
Checking
$200,000
$25,000
Total
Amount Insured
Amount Uninsured
5
Example 2: Joint Accounts
Account Title
Deposit
Type
Account
Balance
Mary and John Smith
MMDA
$230,000
Mary or John Smith
Savings
$300,000
Mary or John or Robert
Smith
CD
Share Per
Owner
$270,000
Total
Insurance coverage for each owner is calculated as follows:
Owners
Total of All
Amount Insured
Ownership Shares
Amount
Uninsured
Mary
John
Robert
Total
Deposit Insurance Fund (DIF)
The Dodd-Frank Act requires that the reserve ratio reach 1.35% by September 30, 2020.
6
Banks, not taxpayers, are entirely responsible for covering all of the FDIC’s expenses,
including the recapitalization of the fund.
Truth in Savings Act
Consumers must be informed of the deposit terms before they open a new account
Depository Institutions Must Disclose:
7
School of Accountancy and Finance
FIN 4080
Management of Financial Institutions
Dr. Lucy Chernykh
DEPOSIT MANAGEMENT
Outline
Liability management: Overview
Types of deposit accounts
Deposit pricing
Deposit insurance
Disclosure of deposit terms
Current trends
Liability Management
Key Issues in Deposits Management
1
Types of Deposit Accounts
Transaction (Payment or Demand) Deposits
Nontransaction (Savings or Thrift) Deposits
Types of Transaction Deposits
Noninterest-Bearing Demand Deposits
Interest-Bearing Demand Deposits
2
Types of Nontransaction Deposits
Core Deposits
Core deposits are stable deposits that are not highly interest rate-sensitive.
Interest Rates on Deposits Depend On:
3
Estimating the Marginal Cost of a Deposit Account
MCD =
I S DI
1 - RR
Where
I
= current market interest rate on type of deposit
S
= servicing costs of deposits (expressed as percentage of each dollar acquired)
DI = deposit insurance premium (expressed as percentage of each insured dollar)
RR = Fed reserve requirement of type of deposit
Example. Calculation of MCD
Current market interest rate on NOW account is 6.5%
Cost of servicing the NOW account is 3.4%
Deposit insurance premium is 0.254%
Fed reserve requirement is 10%
The marginal cost of a NOW account deposit is:
4
FDIC Insurance Coverage
FDIC is an independent agency of the US government that protects the funds depositors
place in banks and savings associations.
FDIC insurance covers all deposit accounts, including:
The insurance amount is $250,000 per depositor, per insured bank, for each account
ownership category.
Example 1: Single account
Account Title
Deposit Type
Account Balance
Mary Jones
MMDA
$15,000
Mary Jones
Savings
$20,000
Mary Jones
CD
Mary's Memories
(A Sole Proprietorship)
Checking
$200,000
$25,000
Total
Amount Insured
Amount Uninsured
5
Example 2: Joint Accounts
Account Title
Deposit
Type
Account
Balance
Mary and John Smith
MMDA
$230,000
Mary or John Smith
Savings
$300,000
Mary or John or Robert
Smith
CD
Share Per
Owner
$270,000
Total
Insurance coverage for each owner is calculated as follows:
Owners
Total of All
Amount Insured
Ownership Shares
Amount
Uninsured
Mary
John
Robert
Total
Deposit Insurance Fund (DIF)
The Dodd-Frank Act requires that the reserve ratio reach 1.35% by September 30, 2020.
6
Banks, not taxpayers, are entirely responsible for covering all of the FDIC’s expenses,
including the recapitalization of the fund.
Truth in Savings Act
Consumers must be informed of the deposit terms before they open a new account
Depository Institutions Must Disclose:
7
