Chapter 13 Managing and Pricing Deposit Services: The ability of management and staff to attract checking and savings

deposits from businesses and consumers is an important measure of a depository institutions acceptance by the public • Raw material for loans. • Lowest possible cost, sufficient funds.

1. Where can the funds be raised at the lowest possible cost? 2. How can management ensure that the institution always has enough deposits to support the volume of loans and other investments and services the public demands? Types of Deposits: Transactions deposits: • Making payments on behalf of the customer. 1. Noninterest bearing demand deposits: 2. Interest bearing demand deposits: at least some interest: NOW’s. Bank has the right to insist on prior notice. Individuals and nonprofit organizations only. MMDA’s and Super NOW’s , offering flexible money market interest rates but accessible via check or preauthorized draft to pay for goods and services. Nontransactions deposits: • Savings deposits or thrift deposits, are designed to attract funds from customers who wish to set aside money in anticipation of future expenditures or financial emergencies. Higher interest costs. • Passbook savings deposits were sold to households in small denominations with unlimited withdrawal privileges. Prior notice required but not exercised. Rate stable with little sensitivity to interest rates.

• Bankers prefer high proportion of transactions deposits and low-yielding time and savings deposits. generally lowest average interest rates. • Contrast: discourage post lower rates. Demand less than 1/5th. non-negotiable. • Table 11.• Time deposits for wealthier individuals and businesses. • Bank operating costs in offering deposit services have soared recently. Interest rates offered on differet types of deposits: • Longer term higher rates.S fell from $49 billion in 1995 to 42 billion in 2000. • Value of checks paid in the U. Why? Least expensive and often include CORE DEPOSITS • CORE DEPOSITS: low interest rate elasticity and remain with bank. Many forms such as the negotiable CD. others upward from there. The composition of bank deposits: • Table 13. 10. Fixed maturity and fixed interest rates. Institutions that couldn’t keep up – extra liquidity demands. older less expensive ones have put pressure.2 . Larger and stronger banks. Bankers pushing hard to reduce noninterst expenses therefore.5 billion in 1970 to 80 billion in 2002. • Size and perceived risk exposure of offering institutions. Duration of bank’s liabitlities increases makes institution less vulnerable to changing interest rates.1 • Time and savings deposits 4/5ths of total deposits.new high yielding deposits vs. • Choose to compete aggressively for funds or not.

Activity expenses: processing checks and recording deposits. These will also come down in future because of check imaging. whose rate of return was higher called the implicit rate of interest.this would maximize its spread and possibly net income. mainly savings accounts. particularly NOWs . triggered this idea. . • Development of interest –bearing checkable deposit. So. Check processing and account maintenance costs only. Money market accounts . What are the cheapest deposits? And which deposits generate the highest revenues? Demand deposits. time deposits and savings accounts rank second. Below-cost pricing before this.The functional cost analysis of different deposit accounts: If a bank can raise all of its capital from sales of the cheapest deposits and then turn them around and purchase the highest yielding assets. Pricing deposit related Services: Old dilemma Competition Perfect competition Cost Plus Profit Margin: • Idea of charging customers for full cost of deposit-related services is relatively new. • Great depression to the 1980’s. Conclusion: Public preference. Although checking accounts have same gross expenses per dollar as time deposits do. they have higher service fees.

monthly maintenance fees. assessing charges on cash withdrawals and balance inquiries through ATM’s. raising minimum deposit balances.Then it was time for private decision makers. stop-payment orders. Greater competition because of deregulation has raised average real cost of deposit for bankers COST PLUS PRICING FORMULA: Unit price charged to the customer for each deposit service= Operating expense per unit of deposit service + Estimated overhead expense allocated to the deposit service function + Planned profit for each deposit service unit sold • Result free services eliminated: fees for excessive withdrawals. increasing fees on bounced checks. . charges for balance inquiries.

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