slike bài giảng quản trị ngân hàng chương 3 managing and pricing deposit services

William Chittenden edited and updated the PowerPoint slides for this edition. MANAGING AND PRICING DEPOSIT SERVICES Chapter 3 Key topics • 1. Types of deposit accounts offered • 2. The changing mix of deposits and deposit costs • 3. Pricing deposit services and deposit interest rates • 4. Conditional deposit pricing • 5. Rules for deposit insurance coverage • 6. Disclosure of deposit terms • 7. Lifeline banking 12-2 Key issues depository institutions are faced with 1. Where can funds be raised at lowest possible cost? 2. How can management ensure that there are enough deposits to support lending and other services the public demands? 12-3 Types of deposit accounts  Transaction (payment or demand) deposits  Making payment on behalf of customers  One of the oldest services  Provider is required to honor any withdrawals immediately  Non-transaction (savings or thrift) deposits  Longer-term  Higher interest rates than transaction deposits  Generally less costly to process and manage 12-4 Transaction accounts  Although the interest cost of transaction accounts is very low, the non-interest costs can be quite high  Generally, low balance checking accounts are not profitable for banks due to the high cost of processing checks Transaction accounts  Most banks offer three different transaction accounts  Demand deposits  DDAs (Demand Deposit Accounts)  Negotiable Order of Withdrawal  NOWs  Automatic Transfers from Savings  ATS Types of transaction deposits • Noninterest-bearing demand deposits  Interest was prohibited by Glass-Steagall Act  One of the most volatile and unpredictable sources of funds  Most deposits are held by business firms since Regulation Q prohibits banks from paying explicit interest on for-profit corporate checking accounts 12-7 Regulation Q: http://www.bankersonline.com/regs/217/217-3.html Transaction accounts Interest-bearing demand deposits with limited or no check-writing privileges  Negotiable Orders of Withdrawal (NOW)- hybrid savings instrument – pay interest  ATS (Automatic Transfers) Accounts  Customer has both a DDA and savings account  The bank transfers enough from savings to DDA each day to force a zero balance in the DDA account  For-profit corporations are prohibited from owning NOW and ATS accounts Transaction accounts  Money market deposit accounts  Short-maturity deposit (a few days, weeks, months)  Pay interest but holders are limited to 6 transactions per month, of which only three can be checks  Attractive to banks because they are not required to hold reserves against MMDAs  Held by both individuals and businesses Non-transaction (savings or thrift) deposit An account whose primary purpose is to encourage the bank customer to save rather than make payments. 12-10 [...]... market-determined price to attract and hold depositors or lose funds 12-28 Pricing deposit- related services  Cost-plus pricing  Marginal cost of deposits  Conditional pricing  Relationship pricing 12-29 Cost plus profit deposit pricing The Glass-Steagall Act of 1 933 – Federal limits on interest rates paid on deposits – why? → protect banks from “excessive” interest rate competition for deposits → non-price competition... accounts, special checkbook deposits and interest-bearing checking accounts)  Thrift deposits (money market accounts, time deposits and savings accounts)  Business transaction accounts are more profitable than personal checking accounts  Deposits are determined by public preferences and competition Cost and revenue accounting data for deposit accounts at FirstBank 12- 23 Check 21 and substitute checks... ratio)] Calculating the average net cost of deposit accounts  Example:  Every month, a demand deposit account that does not pay interest has $20.69 in transaction costs charges, $7.75 in fees, an average balance of $5,515, and 5% float plus 10% required reserve would have a yearly net cost of 3. 31% Average Net Cost of Demand Deposit = $0 + $20.69 - $7.75 ×12 = 3. 31% $5,515 × (1 - 15) Measuring the cost... free-of-charge depositrelated services or below-cost pricing → implicit interest rate → fund allocation distortion - The Depository Institutions Deregulation Act of 1980 gradually phases out federal limits on deposit interest rate ( • - • • • • • http://www.allbusiness.com/glossaries/depository-institutions-deregulation-monetary-control-act/49 530 12-1.html ) unbundle service pricing: deposits are priced... interest-rate elasticity) and which tend to remain with the bank 12-19 Core deposits  A large proportion includes transaction deposits and low-yielding time & savings deposits  Small time and savings deposits can be withdrawn immediately, their effective maturity spans over years  Increase bank’s liability duration and reduce interest rate vulnerability  Share in total deposits in small banks (80%)... service pricing: deposits are priced separately • → 12 -30 Cost plus profit deposit pricing Deposit services are priced high enough to cover all costs: Estimating Unit Price Operating Planned Overhead Charged the Expense Profit from Expense Customer = Per Unit of + + Each Allocated to for Each Deposit Service Unit the Deposit Service Service Sold Function 12 -31 Historical average cost approach Determines the... ( 63% ) (FDIC: 2007)  Declining trend due to inflation, deregulation, stiff competition and better educated-customers Holders of deposits  Private sector: individuals, partnership and corporation (75%)  State and local government (4%)  Foreign governments, businesses, individuals, mostly in off-shore offices  Other financial institutions (correspondent deposits) Cost of deposits  Checkable deposits... be informed of the deposit terms before they open a new account  Depository institutions must disclose:  Minimum balance to open  Minimum to avoid fees  How the balance is figured  When interest begins to accrue  Penalties for early withdrawal  Options at maturity  And the APY (average yields) 12-27 Pricing deposit- related services  Banks need to pay high enough to attract depositors  Banks... source of longterm funding for banks 12-16 Interest rates on deposits depend on:  The maturity of the deposit  The size of the offering institution  The risk of the offering institution  Marketing philosophy and goals of the offering institution 12-17 The changing composition of deposits in the US * Saving deposits include MMDAs 12-18 Core deposits A stable base of funds that is not highly sensitive... maturity Small time deposits (Jumbo CDs):    Usually acquired by individuals nonnegotiable form CDs with smaller denomination Cannot be traded before reaching maturity 12- 13 Popular types of CDs • Bump-up CD – allows a depositor to switch to a higher interest rate if market rates rise • Step-up CD – permits periodic upward adjustments in the promised interest rate • Liquid CD – permits the depositor to . and updated the PowerPoint slides for this edition. MANAGING AND PRICING DEPOSIT SERVICES Chapter 3 Key topics • 1. Types of deposit accounts offered • 2. The changing mix of deposits and deposit. and deposit costs • 3. Pricing deposit services and deposit interest rates • 4. Conditional deposit pricing • 5. Rules for deposit insurance coverage • 6. Disclosure of deposit terms • 7. Lifeline. accounts  Demand deposits  DDAs (Demand Deposit Accounts)  Negotiable Order of Withdrawal  NOWs  Automatic Transfers from Savings  ATS Types of transaction deposits • Noninterest-bearing demand deposits  Interest