Chapter
Management of Deposits
3
This chapter has multiple goals. One of the most important is to
learn about the different types of deposits banks offer and from the
perspective of a bank’s manager, to discover which types of deposits
are among the most profitable for banks to offer their customers. We
also want to explore how a bank’s cost of funding can be determined
and examine the different methods open to banks to price the
deposits and deposit-related services they sell to the public.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Outline
❑ Deposit Mix
❑ Factors Determining the Level of Deposits
❑ Deposit Insurance Scheme and
❑ Deposits Pricing
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Concept of Deposit
◼A deposit is a sum of money held in a financial
institution, such as a bank, for safekeeping or to earn
interest (profit).
◼ Deposits are a
◼ Key element in banking business
◼ Plays critical roles in the economy
◼ Provide much of the raw material for making loans
◼ The ultimate source of profits and growth for a
depository institution
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Deposit Management
Deposit management includes all the activities
related with bank deposits i.e., volume, mixes,
ownership and movements.
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Deposit Management
Where can funds be raised at
lowest possible cost?
Two Key Issues
Important
indicators of
management’s
effectiveness
How can management ensure
that the institution always
has enough deposits to
support lending and other
services the public demands?
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Types of Deposit
Transaction (Payments or Demand) Deposit
An account used primarily to make
payments for purchases of goods and
services.
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Types of Deposit
Non-Transaction (Thrift or Savings) Deposit
An account whose primary purpose is to
encourage the bank customer to save rather
than make payments.
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Types of Transaction Deposits
◼ Noninterest-Bearing Demand Deposits
◼ Current Deposit (CD)
◼ Interest-Bearing Demand Deposits
◼ Negotiable
Orders of Withdrawal (NOW) Account
◼ Money Market Deposit Account (MMDA)
◼ Super NOW (SNOW) Account
◼ Mobile check deposit:
◼ Deposit a cheque into your bank account using your
smartphone or tablet's camera and your bank's mobile app.
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Types of Non-Transaction Deposits
◼ Passbook Savings Account (Traditional)
◼ Statement Savings Deposit (Computerized)
◼ Time Deposit (CD)
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Retirement Savings Deposits
◼ Individual Retirement Account (IRA)
◼ Wage earners and salaried individuals.
◼ Offered by depository institutions, brokerage firms, insurance
companies, and mutual funds, or by employers with qualified
pension or profit-sharing plans.
◼ Keogh Deposit
◼ Self-employed persons
◼ Roth IRA
◼ Allows individuals to make non-tax-deductible contributions
to a savings fund that can grow tax free but pay no tax on
their investment earnings when withdrawn.
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Interest Rates on Deposits Depend On:
◼ The maturity of the deposit
◼ The size of the offering bank
◼ The risk of the offering bank
◼ Marketing philosophy and goals of the offering bank
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Core Deposits
A stable and predictable base of deposited funds,
usually supplied by households and smaller businesses,
that is not highly sensitive to movements in market
interest rates but tends to remain loyal to the depository
institution.
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Factors Influencing The Level of Individual
Bank’s Deposit
◼ External (Macroeconomic) Factors
◼ Market Interest Rates (Monetary Policy): Central bank's
policy rate influence the general return on assets,
affecting whether individuals and businesses prefer bank
deposits or other investments (like bonds, stocks).
◼ Economic Growth/GDP/Income: Higher level of real
Gross Domestic Product (GDP) or per capita income
generally leads to higher disposable incomes and
savings, which in turn boosts the potential for bank
deposits.
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Factors Influencing The Level of Individual
Bank’s Deposit
◼ Inflation:
◼ High inflation discourage saving in deposits if the
interest rate is lower than the inflation rate (negative
real interest rate).
◼ However, in some contexts, high inflation might also
prompt individuals to save more to preserve
purchasing power, or seek safer assets like deposits.
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Factors Influencing The Level of Individual
Bank’s Deposit
◼ Money Supply: An increase in the money supply
generally indicates more liquidity in the economy, which
can translate into higher bank deposits, especially in the
short run.
◼ Exchange Rate Stability:
◼ Stable Exchange Rate- encourages deposits in domestic
currency.
◼ Volatile Exchange Rate- encourages deposits in foreign
currency.
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Factors Influencing The Level of Individual
Bank’s Deposit
◼ Government Policies and Fiscal Measures:
Government Disposable
stimulus income
+ +
Transfer Liquidity of Deposit
Affect Affect levels
payments households
+ and
Taxation businesses
policy
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Factors Influencing The Level of Individual
Bank’s Deposit
◼ Bank-Specific (Micro) Factors
◼ Bank stability and confidence
◼ Branch network expansion
◼ Service quality and technology
◼ Product innovation
◼ Bank liquidity and profitability
◼ Deposit rates offered
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Factors Influencing The Level of Individual
Bank’s Deposit
◼ Socio-Demographic and Other Factors
◼ Demographic Variables
◼ Geographic Location (Urban vs. Rural)
◼ Financial Literacy and Awareness
◼ Natural Disasters/Shocks
◼ Security/Regulatory Environment
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Deposits Pricing Methods
◼ Conditional Pricing Method
◼ Cost-Plus Pricing Method
◼ Marginal Cost Pricing Method
◼ Relationship Pricing Method
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Deposits Pricing Methods
(Conditional Pricing Method)
◼ Conditional Pricing Method:
◼ Customer pays a price conditional on how he or she uses
a deposit account.
◼ Low fee/no fee- Average balance above some minimum
level
◼ Higher fee- Average balance falls below that minimum
◼ Factors influencing deposit pricing under Conditional
pricing technique:
◼ Number of transactions
◼ Average balance
◼ Maturity
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Deposits Pricing Methods
(Conditional Pricing Method)
◼ Three Broad Categories of Conditional Pricing Method:
◼ Flat-Rate Pricing: The depositor's cost is a fixed charge
per check or per time period or both.
◼ Free Pricing: It refers to the absence of a monthly
account maintenance fee or per-transaction charge. No
explicit fee is charged, rather an implicit fee is incurred in
the form of lost income (the effective interest rate < the
going rate).
◼ Conditionally Free Pricing: It favours large
denomination deposits because services are free if the
account balance stays above some minimum figure.
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Deposits Pricing Methods
(Cost-Plus Pricing Method)
◼ Cost-Plus Pricing Method:
◼ It calls for estimating all operating and overhead costs
incurred in providing each service and adds a margin for
profit.
Estimated
Unit Price Overhead
Operating Planned Profit
Charged the Expense
Expense Per Margin from
Customer for = + Allocated to +
Unit of Deposit Each Service
Each Deposit the Deposit
Service Unit Sold
Service Service
Function
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Deposits Pricing Methods
(Cost-Plus Pricing Method)
◼ This method has encouraged deposit providers to match
prices and costs more closely and eliminate many
formerly free services.
◼ But now many FIs are raising required minimum deposit
balances and imposing fees for
◼ excessive withdrawals
◼ customer balance inquiries
◼ bounced checks
◼ stop-payment orders and
◼ ATM usages
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Deposits Pricing Methods
(Marginal Cost Pricing Method)
◼ Marginal Cost Pricing Method:
◼ The offering institution will set its price at a level just
sufficient to attract new funds and still earn a profit on
the last dollar of new funds raised.
Marginal
Total Total
cost or New Old
funds funds
Change = interest × - interest ×
raised at raised at
in total rate rate
new rate old rate
cost
Change in total cost
Marginal cost rate =
Additional funds raised
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Deposits Pricing Methods
(Marginal Cost Pricing Method)
Problem: A bank is attempting to raise new deposit funds. Information
are given below:
Expected Amounts of New Deposits That Average Interest the Bank Will Pay on
Will Flow In (BDT in million) New Funds
25 7.0%
50 7.5%
75 8.0%
100 8.5%
125 9.0%
The bank expects to earn 10 percent on these new funds.
Requirements:
1. Find out Marginal Cost (in amount).
2. Find out Marginal Cost Rate.
3. Find out Total profit earned.
4. Which one is the best choice as per Marginal Cost Pricing Method?
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Deposits Pricing Methods
(Relationship Pricing Method)
◼ Relationship Pricing Method:
◼ It calls for assessing lower fees or promising more
generous yields to those customers who are the most
loyal.
◼ In theory at least, relationship pricing
◼ promotes greater customer loyalty and
◼ makes the customer less sensitive to the prices.
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Deposit Insurance Scheme
◼A Deposit Insurance Scheme (DIS) is a financial safety
mechanism designed to protect depositors’ money in
banks and other financial institutions in case those
institutions fail to pay their debts or become insolvent.
◼ InBangladesh, Deposit Insurance Scheme (DIS) is
operated by the Bangladesh Deposit Insurance
Corporation (BDIC) under the Bank Deposit Insurance
Act, 2000.
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Deposit Insurance Scheme
◼ Key Functions of Deposit Insurance Scheme:
◼ Protecting small depositors from losing their savings
◼ Enhancing public confidence in the banking system
◼ Helping maintain financial stability in the economy
◼ Preventing bank runs (mass withdrawal of deposits
due to panic)
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Deposit Insurance Scheme
◼ Coverage under DIS in Bangladesh:
◼ Each depositor of a scheduled bank is insured up to a
maximum of Tk 1 lakh (The Bangladesh Bank has
drafted a new ordinance to increase the limit to Tk 2 lakh
per depositor.)
◼ If a bank fails, depositors will get at least this insured
amount back, regardless of how much they had
deposited.
◼ This coverage applies to the aggregate of all deposits
(savings, fixed, current, recurring, etc.).
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Deposit Insurance Scheme
◼ Administrator:
◼ The scheme is managed by a Trustee Board, which is the
Board of Directors of Bangladesh Bank. The Deposit
Insurance Department (DID) of Bangladesh Bank is
entrusted with administering its activities.
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Deposit Insurance Scheme
◼ Membership:
◼ Membership in the Deposit Insurance Scheme is
compulsory for all scheduled banks, including branches
of foreign banks operating in Bangladesh.
◼ Funding:
◼ The scheme is funded by the Deposit Insurance Trust
Fund (DITF), which collects half-yearly, risk-based
premiums from the member banks. The DITF is invested
in government securities to grow the fund.
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Deposit Insurance Scheme
◼ Exclusions in DIS in Bangladesh:
◼ Deposits from the Government of the People's Republic of
Bangladesh
◼ Deposits of foreign governments
◼ Inter-bank deposits
◼ Any amount due on account depositors
◼ Any amount specifically exempted by the DIS
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Thanks to all
Any Question?
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