Bank deposits. Banks carrying lending and investment operations have the use of the

Banks carrying lending and investment operations have the use of the

money of their clients from the moment they pay their money into the

bank till the moment they draw it out. The accounts they hold with the

bank have credit balances and are called deposits.

Deposits are the raw material of banking and, thus, represent the ul-

timate source of bank profitability and growth. They are a unique item

on a bank’s balance sheet that clearly distinguishes a bank from other

types of business firms. There are two main types of accounts opened by

the British clearing banks for their customers: the current account and

the deposit account. Some banks provide a savings bank account. It is

worth mentioning that banks have been eager in recent years to attract

the accounts of even quite modest private people, despite the likely small

size of the individual deposits and the high overheads incurred in servic-

ing such accounts. The banks do not pay their customers any interest on

current accounts, but provide some free of charge services to the holders

and issue them with checkbooks. An account of checks paid, credits re-

ceived and resulting balances is printed out by the bank’s computer and

sent to the customer. Big companies will require their statements daily,

small private customers usually get theirs every three or six months. If

an account becomes overdrawn a special code sign warns the account

holder that his balance is in the debit. In case of overdrafts, a bank levies

extra charges. Money on a deposit account is not instantly available but

can be withdrawn after giving the bank seven days’ notice. Banks pay

interest on deposit accounts. For years this rate was fixed at 2 per cent

below bank rate but now the banks key their rates to a base rate which

varies with the money market rates.

There has been a steady drift of funds out of current into deposit

accounts and also away from the clearing banks into interest-earning

deposits of other financial institutions. However, many experts find it

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surprising that over half of all clearing bank deposits are still current ac-

count deposits on which the banks pay no interest, and in fact on which

they often levy charges to meet the expenses of servicing the account.

In the U.S. there are three main types of deposits. Demand depos-

its are similar to current accounts. They are more commonly known as

checking accounts because they are sums standing to the credit of the

customer which the bank undertakes to make immediately available to

meet checks drawn against them, or of course as cash across the counter.

They are the principal means of making payments.

Savings deposits generally are in small dollar amounts; they bear a

relatively low-interest rate but may be withdrawn by the depositor with

little or no notice. These deposits are designed to attract funds from cus-

tomers who wish to set aside monies in anticipation of future expendi-

tures. While their interest cost is higher, thrift deposits are generally less

costly for a bank to process or manage. Passbook savings deposits and

statement savings deposits are the main types of saving plans. Passbook

savings deposits are sold to household customers in small denomina-

tions. The customers are given small booklets showing current balances

in the account, any interest earnings, deposits and withdrawals. Usually

a passbook must be presented by a depositor to a bank teller in order to

make deposits or withdrawals. Statement savings deposits are evidenced

only by computer entry. The customer can get monthly computer print-

outs showing all the relevant information.

Time deposits carry a fixed maturity and offer the highest interest

rates a bank can pay. Time deposits may be divided into nonnegotiable

certificates of deposit (CDs), which are usually small, consumer-type

accounts, and negotiable CDs, that may be traded in the open market

and are purchased mainly by corporations.

New forms or checkable (demand) deposits appeared, combining

the essential features of both demand and savings deposits. These trans-

action accounts include negotiable orders of withdrawal (NOWs) and

automatic transfer services (ATS). NOW accounts may be drafted to

pay bills but also earn interest, while ATS is a preauthorized payments

service in which the bank transfers funds from an interest-bearing sav-

ings account to a checking account as necessary to cover checks writ-

ten by the customer. Two relatively new transaction accounts—money

market deposits accounts (MMDAs) and Super NOWs—were offered.

MMDAs, designed to compete directly with the high-yielding share ac-

counts offered by money market mutual funds, and Super NOWs may

carry prevailing market rates on short-term liquid funds. Both can be

drafted by check, automatic withdrawal, or telephone transfer, but the

number of permissible withdrawals from MMDAs is limited. MMDAs

may be held by an individual, business firm, or unit of government, but

Super NOWs can be held only by individuals, governments, and non-

profit organizations.

Each of the different types of deposits carries a different rate of in-

terest or yield to the depositor. In general, the longer the maturity of a

deposit, the greater the yield that must be offered. For example, NOW

deposits and MMDAs are subject to immediate withdrawal by the cus-

tomer and, accordingly, their offer rate to bank customers is among the

lowest of all deposits. In contrast negotiable CDs and deposits of a year

or longer to maturity often carry rates higher by a full percentage point

or more. The size and perceived risk exposure of the offering banks also

play an important role in shaping deposit interest rates.

1. Why are deposits so important?

2. What are the advantages and disadvantages of the current account

from the point of view of a bank customer?

3. What are the main types of deposits in the U.S.?

4. Why are demand deposits often referred to as checking accounts?

5. What do checking accounts in the U.S. and current accounts in

Great Britain have in common and in what do they differ?

6. What is the difference between the two main forms of savings de-

posits in the U.S.?

7. Do all the deposits sold by American banks carry the same yield?

8. What are the factors that influence the shaping of deposit interest

rates?

Text 3

Read the text and identify the problem discussed in the text. Be ready to answer the

questions given below.