Chapter 13

MANAGING AND PRICING

DEPOSIT SERVICES
 Deposits are the foundation upon which banks
thrive and grow
 The ability of a bank’s management and staff to
attract checking and savings accounts from
businesses and consumers is an important
measure of the bank’s acceptance by the public.
 Raw material
 Management’s efficiency can be measured by
whether or not deposited funds have been
raised at the lowest possible cost and whether
enough deposits are available to fund those
loans the bank wishes to make.
 Two major questions bank management is
always trying to answer are:
1. Where can the bank raise funds at the lowest
possible cost?
2. How can management ensure that the bank
always has enough deposits to support the
desired volume of loans and other financial
services demanded by the public?
 Innovation, is the form of new deposit plans,
service delivery methods and pricing schemes,
is extensive in banking today.
Types of Deposits Offered by
the Banks
 Transaction (payments) Deposit: an account
used primarily to make payments for
purchases of goods and services.
 Noninterest-bearing Demand Deposits
 Interest-bearing Demand Deposits (Negotiable
order of withdrawal NOW accounts)
 Money market deposit accounts
 Supper NOWs
 Non transaction (Saving or Thrift) Deposits
 Thrift deposit
 Passbook savings deposits
 Time deposit
Composition of Bank Deposits

 Core Deposits: Among the most loyal and

stable of a bank’s deposited funds normally
owned by households and small businesses
Pricing Deposits at Cost Plus
Profit Margin
 Pricing of the deposits are very important as
the banks should know how much they are
paying to buy the raw material.
 Cost-plus-profit deposit pricing:
 Establishing the rate of return or fees charged on
a deposit account based upon the cost of offering
the service plus a profit margin.
 Unit price charged the customer for
each deposit service

Operating Estimated Planned profit

expense per unit overhead expense from each
of deposit allocated to the deposit service
service bank’s deposit unit sold
function
 Estimating Average Deposit
Service Costs
 Bankers are required
1. to calculate cost rate of each source of bank
funds (adjusted for reserves required by the
central bank, deposit insurance fees and float)
2. to multiply each cost rate by relative proportion
of bank funds coming from that particular
source
3. To sum all resulting products to derive the
weighted average cost of the bank funds
 Data for Question

Type of fund Amount RoR Reserve

Requirement
Checkable 100 10 15
deposit
Saving deposit 200 11 5

Money market 50 11 2

Equity 50 22
Weighted Average (checkbook deposits /total funds
raised) x (interest and noninterest fund-raising
cost/ 100%-percentage reserve requirements and
float) + (time and saving deposits / total funds
raised) x (interest and noninterest fund- raising
costs/ 100% - percentage reserve requirements
and float) + (owner’s capital / total funds raised) x
(interest and noninterest costs/ total funds raised)
x (interest and noninterest cost/ 100%)
 100/400 x 10% / (100%-15%) + 200/400
x 11% / (100%- 5%) + 50/400 x 11% /
(100% - 2 %) + 50 / 400 x 22% / 100%
=12.88%