Bank deposits

Date: 2015-10-07; view: 466.

Banks carrying lending and investment operations have the use of the money of their clients from the moment they pay their money into the bank till the moment they draw it out. The accounts they hold with the bank have credit balances and are called depo­sits.

Deposits are the raw material of banking and, thus, represent the ultimate source of bank profitability and growth. They are a unique item on a bank's balance sheet that clearly distin­guishes a bank from other types of business firms. There are two main types of accounts opened by the British clearing banks for their customers: the current account and the deposit account. Some banks provide a savings bank account. It is worth mentioning that banks have been eager in recent years to attract the accounts of even quite modest private people, despite the likely small size of the individual deposits and the high overheads incurred in servicing such accounts. The banks do not pay their customers any interest on current accounts, but provide some free of charge services to the holders and issue them with checkbooks. An account of checks paid, credits received and resulting balances is printed out by the bank's computer and sent to the customer. Big companies will require their statements daily, small private customers usually get theirs every three or six months. If an account becomes overdrawn a special code sign warns the account holder that his balance is in the debit. In case of overdrafts, a bank levies extra charges. Money on a deposit account is not instantly available but can be withdrawn after giving the bank seven days' notice. Banks pay interest on deposit accounts. For years this rate was fixed at 2 per cent below bank rate but now the banks key their rates to a base rate which varies with the money market rates.

There has been a steady drift of funds out of current into deposit accounts and also away from the clearing banks into interest-earning deposits of other financial institutions. However, many experts find it surprising that over half of all clearing bank deposits are still current account deposits on which the banks pay no interest, and in fact on which they often levy charges to meet the expenses of servicing the account.

In the U.S. there are three main types of deposits. Demand deposits are similar to current accounts. They are more commonly known as checking accounts because they are sums standing to the credit of the customer which the bank undertakes to make immediately available to meet checks drawn against them, or of course as cash across the counter. They are the principal means of making payments.

Savings deposits generally are in small dollar amounts; they bear a relatively low-interest rate but may be withdrawn by the depositor with little or no notice. These deposits are designed to attract funds from customers who wish to set aside monies in anticipation of future expenditures. While their interest cost is higher, thrift deposits are generally less costly for a bank to process or manage. Passbook savings deposits and statement savings deposits are the main types of saving plans. Passbook savings deposits are sold to household cus­tomers in small denominations. The customers are given small book­lets showing current balances in the account, any interest earnings, deposits and withdrawals. Usually a passbook must be presented by a depositor to a bank teller in order to make deposits or withdrawals. Statement savings deposits are evidenced only by computer entry. The customer can get monthly computer printouts showing all the relevant information.

Time deposits carry a fixed maturity and offer the highest interest rates a bank can pay. Time deposits may be divided into nonnegotiable certificates of deposit (CDs), which are usually small, consumer-type accounts, and negotiable CDs, that may be traded in the open market and are purchased mainly by cor­porations.

New forms or checkable (demand) deposits appeared, combining the essential features of both demand and savings deposits. These transaction accounts include negotiable orders of withdrawal (NOWs) and automatic transfer services (ATS). NOW accounts may be drafted to pay bills but also earn interest, while ATS is a preauthorized payments service in which the bank transfers funds from an interest-bearing savings account to a checking account as necessary to cover checks written by the customer. Two relatively new transaction accounts—money market deposits accounts (MMDAs) and Super NOWs—were offered. MMDAs, designed to compete directly with the high-yielding share accounts offered by money market mutual funds, and Super NOWs may carry prevailing market rates on short-term liquid funds. Both can be drafted by check, automatic withdra­wal, or telephone transfer, but the number of permissible withdra­wals from MMDAs is limited. MMDAs may be held by an individual, business firm, or unit of government, but Super NOWs can be held only by individuals, governments, and nonprofit organiza­tions.

Each of the different types of deposits carries a different rate of interest or yield to the depositor. In general, the longer the maturity of a deposit, the greater the yield that must be offered. For example, NOW deposits and MMDAs are subject to immediate withdrawal by the customer and, accordingly, their offer rate to bank customers is among the lowest of all deposits. In con­trast negotiable CDs and deposits of a year or longer to matu­rity often carry rates higher by a full percentage point or more. The size and perceived risk exposure of the offering banks also play an important role in shaping deposit interest rates.

1. Why are deposits so important?

2. What are the advantages and disadvantages of the current account from the point of view of a bank customer?

3. What are the main types of deposits in the U.S.?

4. Why are demand deposits often referred to as checking accounts?

5. What do checking accounts in the U.S. and current accounts in Great Britain have in common and in what do they differ?

6. What is the difference between the two main forms of savings deposits in the U.S.?

7. Do all the deposits sold by American banks carry the same yield?

8. What are the factors that influence the shaping of deposit interest rates?