Contents
Deposits Mix
Factors Determining the Level of Deposits
Deposit Insurance Scheme
Deposits Pricing
Using Marginal Cost to Set Interest Rates on Deposits
First three topics- Bank Management by A R Khan
The last Two - Bank Management and Financial Services- Peter S. Rose
Deposits Mix
Deposit mix (DM) is the combination of total deposits of the bank with
different kinds of deposit schemes.
It is very useful for stable fund and bank management.
The nature of DM are mainly of three kinds.
1) Ownership mix of deposit
2) Types of deposit mix
3) Size mix of deposit
Deposits Mix
Ownership mix of deposit:
Owners of the deposit include individuals, business firms, industrial
organization, government and foreigners (both institutions and
individuals).
Pattern of deposit and withdrawal of each owner is different.
Diversification of ownership helps to maintain a stable fund for profitable
utilization with minimum risk.
Types of deposit mix: Savings, Current and Fixed Deposits
Size mix of deposit: Large, medium and small deposits
Factors Determining the Level of Deposits
Level of deposit (i.e; the size of deposit) is directly related to bank performance.
Internal Factors
Quality of Bank Personnel
Diversified Services
Public Confidence
Interest Rate External Factors
State of the National Economy
Characteristics of Local Economy
Role of Government
Relative Changes in Population
Deposit Insurance Scheme
Deposit Insurance Scheme (DIS) protects the depositors against the
loss of their deposits in the event that a scheduled bank is unable to
meet its obligations.
FDIC (USA) is assigned for this job.
In July 2000 "The Bank Deposit Insurance Act 2000“ was enacted.
Deposit Insurance in Bangladesh is now being administered by this
Act. In 2006 Bangladesh Bank became the member of International
Association of Deposit Insurers (IADI).
What does a Deposit Insurer Do?
In case of bank’s default while satisfying the depositors’ needs a deposit
insurer (FDIC) does the following: -
Working as a middleman between the banks and depositors to
negotiate the return of deposits.
Merging the weak banks with the strong banks.
Supervising through other insurance companies to nurse a sick bank to
get it out of the crisis.
Deposit Pricing
In pricing deposit services, management is caught on the horns of an
old dilemma.
It needs to pay a high enough interest return to customers to attract
and hold their funds, but must avoid paying an interest rate so costly it
erodes any potential profit margin from using customer funds.
In fact, in a financial marketplace that approaches perfect competition,
the individual depository institution has little control over its prices.
Cost Plus Profit Deposit Pricing
• Here deposits are usually priced separately from other services.
• Each deposit service may be priced high enough to recover all or most of
the cost of providing that service, using the following cost-plus pricing
formula:
• Banks are now levying fees for excessive withdrawals, customer balance
inquiries, bounced checks, stop-payment orders, and ATM usages, as well
as raising required minimum deposit balances.
Historical Average Cost Approach
Determines the Bank’s Cost of Funds by Looking at the Past.
It Looks at What Funds The Bank Has Raised to Date and What Those
Funds Have Cost
Conditional Pricing
A Conditional Method of Pricing Deposit Services in Which the Fees Paid
by the Customer Depend Mainly Upon the Account Balance and the
Volume of Account Activity.
It depends on: -
The Number of Transactions Passing Through the Account
The Average Balance Held Over Some Designated Period
The Maturity of the Deposit in Days, Weeks or Months
Conditional Pricing
Relationship Pricing
Related to the idea of targeting the best customers for special
treatment is the notion of pricing deposits according to the number of
services the customer uses.
Customers who purchase two or more services may be granted lower
deposit fees compared to the fees charged customers having only a
limited relationship to the offering institution.
The idea is that selling a customer multiple services increases the
customer’s dependence on the institution and makes it harder for that
customer to go elsewhere.
In theory at least, relationship pricing promotes greater customer
loyalty and makes the customer less sensitive to the prices posted on
services offered by competing financial firms.
Other Approaches…
Market Penetration Deposit Pricing:
The Method of Selling Deposits That Usually Sets Low Prices and Fees
Initially to Encourage Customers to Open an Account and Then Raises
Prices and Fees Later On.
Related Aspects
Lifeline Banking
Some People Feel That All Individuals Are Entitled to a Minimum Level
of Financial Services.
No Matter Their Income Level.
Using Marginal Cost to Set Interest Rates on Deposits
Marginal cost —the added cost of bringing in new funds—and not
historical average cost, which looks at the past, should be used to help
price funds sources for a financial-service institution.
Using Marginal Cost to Set Interest Rates on Deposits
Exercise:
A bank expects to raise $25 million in new deposits by offering its
depositors an interest rate of 7 percent. Management estimates that if the
bank offers a 7.50 percent interest rate, it can raise $50 million in new
deposit money. At 8 percent, $75 million is expected to flow in, while a
posted deposit rate of 8.5 percent will bring in a projected $100 million.
Finally, if the bank promises an estimated 9 percent yield, management
projects that $125 million in new funds will result from both new and
existing deposits that customers will keep in the bank to take advantage
of the higher rates offered. Let’s assume as well that management believes
it can invest the new deposit money at a yield of 10 percent. This
investment yield represents marginal revenue, the added operating
revenue the bank will generate by making new investments from new
deposits. Given these facts, what deposit interest rate should the bank
offer its customers?
Using Marginal Cost to Set Interest Rates on Deposits
Solution: The 8.5 percent deposit rate is clearly the best choice, given all the
assumptions and forecasts made. But how?
Home Work
A bank determines from an analysis of its cost accounting figures that for
each $500 minimum balance checking account it sells, account processing
and other operating costs will average $4.87 per month and overhead
expenses will run an average of $1.21 per month. The bank hopes to achieve a
profit margin over these particular costs of 10 percent of total monthly costs.
What monthly fee should it charge a customer who opens one of these
checking accounts?
Question
&
Answer
FIN-642_Test-1
Test Start: 4:45pm
Submission Deadline: 5:15 pm
Email: anam.haq@cu.ac.bd
Subject of the Email: FIN-642_Test-1
Test Question.1 [ 5 Marks]
People’s Bank has average asset duration of 3.25 years and average liability
duration of 1.75 years. Its liabilities amount to $485 million, while its assets total
$512 million. Suppose that interest rates were 7 percent and then rise to 8
percent. What will happen to the value of the People’s Bank’s net worth as a
result of a decline in interest rates?
Test Question. 2 [ 5 marks]
What are the goals of ALM? [Words Limit 20]
What does the negative sign mean? [Words Limit 20]
