Chapter 3

Management of Deposit

(Book Chapter-13)
Q: What are the major types of deposit plans that depository institutions offer today?

Deposit plans can be divided broadly into –

• transaction deposits,
• thrift or non transaction deposits, and
• hybrid deposits.

The primary function of transaction deposits is to make payments and these deposits include
regular checking accounts and NOW accounts. An Account Used Primarily to Make Payments for
Purchases of Goods and Services.

The principal function of thrift deposits An Account Whose Primary Purpose is to Encourage the
Bank Customer to Save Rather than Make Payments.

Types of thrift deposits-

• Passbook Savings Account

• Statement Savings Deposit
• Time Deposit (CD)
• Individual Retirement Account (IRA)
• Keogh Deposit
• Roth IRA

Hybrid deposits combine transactions and thrift features and include money-market deposit
accounts and Super NOWs.

Q: What are core deposits, and why are they so important today?

A Stable Base of Funds that is Not Highly Sensitive to Movements in Market Interest Rates and
Which Tend to Remain with the Bank.

Core deposits are the most stable components of a depositary institution’s funding base and
usually include smaller-denomination savings and third-party payments accounts. They are
characterized by relatively low interest-rate elasticity. Holding a substantial proportion of core
deposits has an advantage in having access to a stable and cheaper source of funding with
relatively low interest-rate risk.
Q: What is Negotiable Orders of Withdrawal (NOW) account?

NOWs are interest-bearing savings deposits that give the offering depository institution the
right to insist on prior notice before the customer withdraws funds. Because this notice
requirement is rarely exercised, the NOW can be used just like a checking (transaction) account
to pay for purchases of goods and services. NOWs were permitted nationwide beginning in
1981 as a result of passage of the Depository Institutions Deregulation Act of 1980.

Q: What is pricing deposit -related service?

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.

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.

Q:Use the APY formula required by the Truth in Savings Act for the following calculation. Suppose that
a customer holds a savings deposit in a savings bank for a year. The balance in the account stood at
$2,000 for 180 days and $100 for the remaining days in the year. If the Savings bank paid this
depositor $8.50 in interest earnings for the year, what APY did this customer receive?