Welcome to Advance

Commercial Banking!

Lecturer: Hai Hang Email: Faculty of Banking

Nguyen hangnth@[Link] and Finance - UEL
Welcome to Advance Commercial
Banking!

Introduction Course Overview

- Course Instructor - Course Objectives
- Students - Assessment Scheme
- Teaching Schedule
- General Expectations
 Course
objectives

Why do you need to study this

course?
1. Advance your
knowledge of
commercial bank
activities
2. Apply knowledge in
decision making
3. Develop working skills
in the banking industry
Assessment • (*) Participation includes presentation (group) (20%), and
participation (10%) in class activities

scheme • The presentation will be performed by group work; the group’s

members and topics for the presentation will be randomly assigned.

ACTIVITIES Percentages
Participation (*) 30%
Midterm (LMS) 20%

Final exam (Multiple 50%

choices + Constructed
response + Case)
Tình huống
Tình huống
Dựa trên kiến thức về Nghiệp vụ Ngân hàng Thương
mại và Pháp luật Ngân hàng, hãy giải quyết tình huống
trên bằng cách trả lời các câu hỏi sau:
Về mặt pháp lý: Xác định chủ sở hữu hợp pháp của
số tiền 13.000.000 VNĐ và trách nhiệm của Khách
hàng A theo Bộ luật Dân sự 2015.
Về mặt nghiệp vụ: Việc Ngân hàng tự động trích nợ
7.000.000 VNĐ để thanh toán cho các dịch vụ số khi có
đủ số dư là đúng hay sai? Căn cứ vào quy định nào?
Về mặt xử lý tình huống: Nếu là nhân viên Ngân
hàng, bạn sẽ tư vấn cho Khách hàng A và người
chuyển nhầm tiền như thế nào để đảm bảo quyền lợi
các bên và uy tín của Ngân hàng?
 MANAGING AND
PRICING DEPOSIT
SERVICES
Deposit accounts are the number one source of funds
for most bank!
Agenda

I. Type of deposit accounts

II. How are deposits priced
III. How to determine deposit
costs
IV. Conditional deposit pricing
V. Problem-solving (1,2,3)
I. Type of deposits offered by banks

1. Transaction (payments or demand)

deposits
➢Allow customers to withdraw at any time
➢Support customers in performing
transactions: checks, transfer…
➢Most volatile and least predictable of
➢Regular non-interest-bearing deposits &
Interest-bearing deposits
I. Type of deposits offered by banks

2. Nontransaction (saving or thrift) deposits

➢Higher interest
➢Customers should notify the bank in advance
for their withdrawal (but technically not)
➢More stable sources of fund
➢ Businesses are limited in the U.S
➢Time deposits: carry a fixed maturity date
(30,60,180 days…), fixed interest rate
➢Minimum maturity date for time deposits: 7
days
I. Type of
deposits offered
by banks (cont.)

3. CDs (Certificates of
deposits)
➢ Risk-free investment
product
➢ Higher rate compared to
time deposits
➢ But there is a penalty for
CD holder withdraws
before the maturity date
 I. Type of
3. CDs: Classification
deposits ➢ Negotiable form: can be traded before the
offered by maturity date.
➢ Non-negotiable form: can not be traded.
banks ➢ Bump-up CDs: allows customers to switch
to higher interest rates.
(cont.) ➢ Step-up CDs: periodic upward
adjustments in promised interest rate
➢ Liquid CDs: Customers can withdraw
some amount before the maturity date
without penalty.
I. Type of
deposits 4. Retirement saving accounts
➢ Encourage saving for retirement
offered ➢ Wage earned and salaries put into
retirement saving accounts are tax-
by banks free

(cont.)
 Deposit is the source of
funds, and banks have to
pay to obtain funds
What is the cheapest
source of funds?
Should the bank always
focus on the cost?
 Less costly deposits, or

What does Deposit that generates the

it mean by largest net revenue after all
“cheap”? expenses!

What is the deposit cost?

II. How to
determine
deposit cost?
❖ Element impact cost of a
deposit
• Deposit rate
• Expenses for
customer services
• EX: check
return,
transferring fee,
ATM using fee,
overdraft fee
• Turnover of saving
account
II. Deposit cost:
Rank of cost for deposit account
Discuss the cost and benefit
between the two.

Demand
deposit?

Saving
deposit?
II. How to determine deposit cost?
Note!

Banks prefer low-cost

deposits, but:
• Banks also prefer more
stable (core deposits) to
reduce the risk of liquidity.
• The longer the time to
maturity, the higher the yield
 Should we charge the
customer for the total
cost of deposit-related
III. Pricing services?
deposit
services
How are deposits
priced?
 III. Pricing ❖Pricing deposit-related
deposit services services
(cont.) ➢Depositor will be
Should we charged if
charge • Insufficient fund
customers all • Stop–payment orders
cost? •…
➢Competition with
below-cost pricing
➢Market-determined
price!
 III. Pricing deposit services (cont.)
Cost-plus profit pricing formula
𝑼𝒏𝒊𝒕 𝒑𝒓𝒊𝒄𝒆 𝒄𝒉𝒂𝒓𝒈𝒆𝒅 𝒇𝒐𝒓 𝒆𝒂𝒄𝒉 𝒅𝒆𝒑𝒐𝒔𝒊𝒕 𝒔𝒆𝒓𝒗𝒊𝒄𝒆𝒔

= 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒆𝒙𝒑𝒆𝒏𝒔𝒆 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕 𝒐𝒇 𝒅𝒆𝒑𝒐𝒔𝒊𝒕 𝒔𝒆𝒓𝒗𝒊𝒄𝒆

+𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝒐𝒗𝒆𝒓𝒉𝒆𝒂𝒅 𝒆𝒙𝒑𝒆𝒏𝒔𝒆 𝒂𝒍𝒍𝒐𝒄𝒂𝒕𝒆𝒅 𝒕𝒐

𝒕𝒉𝒆 𝒅𝒆𝒑𝒐𝒔𝒊𝒕 𝒔𝒆𝒓𝒗𝒊𝒄𝒆 𝒇𝒖𝒏𝒄𝒕𝒊𝒐𝒏

+𝑷𝒍𝒂𝒏𝒏𝒆𝒅 𝒑𝒓𝒐𝒇𝒊𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 𝒇𝒓𝒐𝒎 𝒆𝒂𝒄𝒉 𝒔𝒆𝒓𝒗𝒊𝒄𝒆

𝒖𝒏𝒊𝒕 𝒔𝒐𝒍𝒅
Estimate cost of raising fund

Cost-plus pricing demands accurate calculation of

cost for each deposit service

=> One particular abroach is to base deposit

prices on the estimated cost of raising funds.
 Costs of raising fund:
Pooled fund cost approach

Estimate Calculate Multiply Sum

Estimate cost of Calculate the cost Multiply each cost Sum all resulting
raising funds: rate of each source rate by the relative products to derive
of funds (adjusted proportion of funds the weighted
reserves required from that source average cost of all
by the central bank, funds raised
insurance fee, and
float)
Costs of raising
fund:
Pooled fund
cost approach

Assumption:
❖ Not the cost of each type
of deposit matters, but
rather the weighted
average cost of all
funding sources!
 Example

➢Bank A generates 400 mils, including:

• $100 checkable deposit – 10% interest, 15% reserved
• $200 time and saving deposit – 11% interest, 5%
reserved
• $50 from the money market – 11% interest, 2% reserved
• $50 from its owners in the form of equity capital – 22%
➢What is the before-tax weighted average cost of funds
for Bank A?
Solution

The weighted average cost of funds =

($100: 400) x 10% : (100%-15%)
+ ($200 : 400) x 11% : (100%-5%)
+($50 : 400) x 11% : (100%-2%)
+($100 : 400) x 22% : (100%)
= 12.8%

=> bank’s loans and other investments should obtain at least 12.8% for
profit
III. Pricing deposit services
How to set interest rate on deposit?

➢ Suppose the bank’s managers expect the following scenarios

o 25 mils in new deposits will flow in if interest is 7%
o 50 mils in new deposits will flow in if interest is 7.5%
o 75 mils in new deposits will flow in if interest is 8%
o 100 mils in new deposits will flow in if interest is 8.5%
• Which interest rate should the bank offer to
maximise its profit?
 III. Pricing
deposit services ➢ Using Marginal cost to set
(cont.) interest rate
❖ Marginal cost = Change in total
How to set cost =
interest rate on New interest rate x Total funds
raised at a new rate – Old interest
deposit? rate x Total funds raised at the old
rate
❖ Marginal cost rate =
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑓𝑢𝑛𝑑𝑠 𝑟𝑎𝑖𝑠𝑒𝑑
• 25 mils in new deposits will flow in
if interest is 7%
50 mils in new deposits will flow in
if interest is 7.5%
Change in the total cost
= 50x7.5% - 25x7%=3.75-1.75=2
Marginal cost rate
2/25=8%
=> 8% is substantially higher cost
than the deposit rate (which is 7.5%)
 Marginal cost
Table 12-2 (page 400) rate= $ 2/25=0.08

Expected Average Total Marginal Marginal Expected Difference Total

amount interest cost of cost of cost rate marginal between profits
interest new revenue marginal earned
deposit (return) revenue
and cost
$25 7% 1.75 1.75 7% 10% +3% 0.75
$50 7.5 3.75 2.00 8 10 +2% 1.25
$75 8.0 6.0 2.25 9 10 +1% 1.5
$100 8.5 8.5 2.5 10 10 +0% 1.5
$125 9.0 11.25 2.75 11 10 -1% 1.25

Bank management and Financial services (Peter [Link], Sylvia Hudgins) Chapter 12 Managing and Pricing Deposit Services
At 9%, add more to cost
than to revenue
Advantage of
marginal cost
approach
➢ Setting deposit interest
rate.
➢ How far should the bank
expand its deposit base.
IV.
Conditional
pricing
❖ Deposit prices vary based on
one or more of these factors:
1. The number of
transactions passing
through the account
2. The average balance
held in the account
over a designated
period
3. The maturity of the
deposit in days, weeks
or months
Example of Conditional deposit (1)
Regular checking account

Minimum opening balance of $100

If the minimum daily balance is

• $600 or more -> No fee
• $300 to 599 -> $5 per month
• Less than $300 -> $10 per month

If the depositor’s collected monthly balance averages $1,500, there is no fee

No limit on the number of checks written

Example of Conditional deposit (2)

❖Regular saving account

• Minimum opening balance of $100
• Service fee
• If the balance <$200 $3 per month
• If balance >= $200 No fee
• Less than $300 $10 per month
• Fee for more than two withdrawals per
month is $2
 Where can funds be
raised at the lowest
Main
question cost?
to
manager
How can management
ensure that the
institution always has
enough deposits?
Problems
• 1, 2, 3 page 409 and 410