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DEPOSITS IN BANKS

DEPOSITS IN BANKS. 4. 4.1 Deposit Accounts 4.2 Interest-Bearing Accounts 4.3 Flow of Deposits 4.4 Deposit Regulations. Lesson 4.1 DEPOSIT ACCOUNTS. GOALS. Define the term transaction accounts, and identify major types of checking accounts

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DEPOSITS IN BANKS

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  1. DEPOSITS IN BANKS 4 4.1 Deposit Accounts 4.2 Interest-Bearing Accounts 4.3 Flow of Deposits 4.4 Deposit Regulations

  2. Lesson 4.1DEPOSIT ACCOUNTS GOALS Define the term transaction accounts, and identify major types of checking accounts Define the term time deposits, and identify major types of savings accounts

  3. DEPOSIT Accounts Deposit accounts fall into two categories • Transaction accounts • Time deposits

  4. TRANSACTION ACCOUNTS • Transaction account - transactions occur at any time and in any number • Demand deposits - payable on demand whenever the depositor chooses • Most common form of a transaction account is a checking account

  5. CHECKING ACCOUNTS • Basic • “Free” • Interest-bearing • Express • Lifeline • “No-Frills” • Asset management

  6. TIME DEPOSITS • Deposits held for or mature at a specified time • Savings Accounts • Money Market Deposit Accounts • Certificates of Deposit (CD) • Less liquid than deposits to checking account • Currently not subject to reserve requirements

  7. SAVINGS ACCOUNTS • Passbook savings accounts • Statement savings accounts • May require up to a seven-day notice when want to withdraw

  8. MONEY MARKET DEPOSIT ACCOUNTS • Money market deposit accounts (MMDAs) - offer a higher rate of interest than savings accounts, but usually require a larger initial deposit • Restrictions • Minimum balance requirement • Limited number of transactions per month (6)

  9. CERTIFICATES OF DEPOSITS • Certificate of Deposit (CD) - certificate offered by a bank that guarantees payment of a specified interest rate until a designated date in the future—the maturity date • Generally - larger the amount of the CD and the longer the term, greater the interest rate • Depositors pay an interest penalty if the money is withdrawn early

  10. CREDIT UNIONS • Offer accounts similar to banks • Share-draft account – functions like a checking account • Share account – functions like a savings account • Share certificate – equivalent to a CD

  11. Lesson 4.2INTEREST-BEARING ACCOUNTS GOALS Explain how interest is calculated Discuss why compound interest is such a powerful savings tool

  12. INTEREST • Price paid for the use of money • Always expressed as a rate or percentage of the total amount of money in use • Calculated over time

  13. CALCULATING INTEREST P  R  T  I Principal  Rate  Time  Interest • Known as simple interest

  14. INTEREST IN THE REAL WORLD • Banks calculate the interest they pay on some fixed interval • Examples of intervals include • Annually—once a year • Semi-annually—every six months • Quarterly—every three months • Adding interest to the principal and paying interest on the new total is called compound interest

  15. THE POWER OF COMPOUNDING F  P(1  R)n • F stands for future value • P is principal • R is rate • n is the number of intervals

  16. Six months $25.00 $1,000.00 $25.00 $1,025.00 1 year $25.00 $1,000.00 $25.63 $1,050.63 1½ years $25.00 $1,000.00 $26.27 $1,076.90 2 years $25.00 $1,000.00 $26.92 $1,103.82 2½ years $25.00 $1,000.00 $27.60 $1,131.42 3 years $25.00 $1,000.00 $28.29 $1,159.71 Total $150.00 $159.71 COMPARING SIMPLEAND COMPOUND INTEREST Simple Interest 5%Compound Interest 5% Time Interest Principal Interest Principal

  17. APR AND APY • APR stands for annual percentage rate. • APY stands for annual percentage yield.

  18. Lesson 4.3FLOW OF DEPOSITS GOALS Explain the complexity of forces that influence the flow of deposits Identify limitations of the Federal Reserve’s influence on the flow of deposits

  19. Flow of Deposits • Is a complex pattern • Individual transactions may not be very complicated however the multiple number of transactions going on in a given day adds to the complexity

  20. FLOW OF DEPOSITS & THE ECONOMIC ENGINE • The engine that drives the flow of deposits is the economy itself • Basic economic principles of supply and demand for goods and services push money through banks • The economy at large plays a far greater role in determining how money is moving than does the government

  21. DEPOSITS AND THE FED • Reserve requirements do not change that often and are not as much a factor in bank lending as general economic conditions • Reserve requirements only apply to the M1 money supply • The Fed does not control other forms of commerce – i.e. non-bank financial institutions

  22. ADJUSTING THE MONEY SUPPLY The Federal Reserve can • Put more money into the economy by buying U.S. government securities on the open market • Effectively take money out of the economy by selling the Treasury securities it holds • Adjust the discount rate

  23. THE BANKING BUSINESS • Governmental measures influence but do not entirely control the flow of deposits • Deposit flow - determined by the needs of all businesses, bank and non-bank, moving money around in the banking system

  24. Lesson 4.4DEPOSIT REGULATIONS GOALS Describe several deposit account documents Identify basic account rules and what they cover

  25. DEPOSIT ACCOUNT DOCUMENTS • Banks are required by state and federal governments to provide documentation regarding rights and responsibilities • Deposit account documents are collectively called governing documents • These documents protect both the consumer and the bank from misunderstanding and loss

  26. TYPICAL DEPOSIT ACCOUNT DOCUMENTS • Account rules - explains characteristics of each type of account – definitions, requirements, restrictions, and other info – very specific • Deposit rate schedules - lists interest rates in effect at the time for various types of accounts • Fee schedules - shows all charges that apply to each specific type of deposit account • Check hold policies - explains when deposited funds will be available for use by the consumer

  27. TYPICAL DEPOSIT ACCOUNT DOCUMENTS continued • Disclosure statements - provide full information about bank policies, such as electronic funds transfer policies, lending policies, interest crediting, and compliance with banking regulations • Above documents referred to as governing documents – general bank policies and fee schedules • Banks are free to change them – must give customers written notice of changes

  28. FEDERAL RESERVE REGULATIONS • Regulations DD requires banks to disclose the interest rate paid and the fees charged on deposits • Regulation D requires banks to maintain adequate reserves for the funds they have on deposit • Regulation CC sets the schedules under which banks must make funds deposited available for withdrawal

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