Funding the bank:

Deposits
Assigned reading:
Chapter 12: Managing and Pricing Deposit Services
Content
Types of deposits
Composition of deposits
Deposit interest rate
Cost of deposits
Annual percentage yield
Deposit

Transaction account (demand deposit/ current account)

Savings account
Time deposit (Term deposit/ Fixed deposit)
Deposit - Transaction account
Purpose: writing checks, fund transfer, bill payment,
cash withdrawal
2 types:
Non-interest bearing : traditional, mostly held by firms
Interest-bearing: negotiable order of withdrawal (NOW), held
by individuals and non-profit organisations
Non-interest cost is high transaction costs
Bank collects monthly service charge for this account
This type of accounts was once a stable source of fund.
But as more products are offered, customers are more
aware of interest rate, they tend to keep balance in
transaction account at the minimum
Deposit - Savings account
Purpose: to earn interest, yet keep the ability to
withdraw funds at any time
Term: n/a, Interest rate: less than that of time
deposit
Non-interest cost is less than that of transaction
account
Link: Fund can be transferred from savings account
to transaction account for payment purpose
Other functions: used as collateral for loans, credit
card
Deposit - Time deposit
Purpose: To earn high interest for a determined
amount of time
Term: from 7 days to years
Interest rate: high and competitive, scaled based on
the term and/or amount of money deposited.
Characteristics
Interest penalty in case of early fund withdrawal
Banks offer various types of time deposit to serve
customers needs
Deposit - Negotiable CD
Interest-bearing deposit certificate, in Large
denomination (>$100k in US).
Negotiable: issued by big banks and traded in
money market
Various types: fixed rate, variable rate, callable,
indexed.
Fact: Only the largest banks with high creditability
can issue and make market for these CD.
Composition of deposits
E.g: ACB
Composition of deposits
E.g: Vietcombank
Ownerships of deposits
ACB
Ownerships of deposits
VCB
Deposit interest rate
Nominal rate: posted by the banks
E.g: Put $100 in a 1-month time deposit, interest rate
12%/year (360-day basis)
Interest that you earn
$100 x (12% x30/360) = $1
Annual percentage yield (APY)
(1 + $1/100)360/30 - 1 = 0.1268 = 12.68%

Note: 1 year can have 360 days or 365 days, it depends

on each country/system regulation
 Cost of Deposit
Average Cost rate =
+
( )

To monitor the banks average historical cost (to

report, support decision making process)
Should it be used for pricing decision?
Cost of Deposit average cost
Should it be used for pricing decision?
No, due to changes in interest rates
Market interest rate goes up, historical cost < actual cost
of new liabilities, assets yields based on historical cost
will not be enough to cover cost -> unprofitable
Market interest rate goes down, historical cost > actual
cost of new liabilities, assets yields based on historical
cost will be too high -> not competitive
Cost of Deposit
Marginal cost is widely used for pricing decision
Marginal cost of deposit = Change in total cost
= New interest rate x Total funds raised at new rate
old interest rate x Total funds raised at old rate

Marginal cost rate =

Other notes
Conditional pricing: interest rates or fees are based
on
Number of transactions through the account
Average balance
Maturity

Relationship pricing
Sell a customer multiple services
Lower the fees
Promote customer loyalty and dependence on the bank