Chapter 4: Deposits in Banks 4.1: Deposit Accounts

Transaction Accounts Account that allows any number of transactions at any time DEMAND DEPOSITS Payable on demand whenever you want it Examples Checking (Simple & Interest-Bearing) Traveler’s Checks Automatic Transfer Service (auto bill pay)

Checking Accounts Basic Interest-Bearing Simple services at minimal or no cost Possible extra costs: ATM Debit card Return of cancelled checks Many banks offer a form of this type; use many different names Interest-Bearing Pays interest on balance if it’s maintained Higher interest if higher minimum balance usually Balance may be average for month or preset minimum Service charges may apply if you go below minimum

Checkable Deposits Deposits that cover demand deposit transactions Funds deposited in checking accounts M1—Highly Liquid Banks must hold reserve funds on these since money could be moved immediately Other Demand Deposit Transactions Traveler’s Checks ATS (Automatic Transfer Service=automatic bill pay)

What is a transaction account? Assignment What is a transaction account? Why are transaction accounts considered demand deposits? Why can the funds in transaction accounts affect the money supply?

Time Deposits Deposits held for a certain time Until maturity Less liquid than checkable accounts Not subject to the Fed’s reserve requirement Examples: Savings Accounts Money Market Deposit Accounts Certificates of Deposit Money Market Mutual Fund Accounts coming up soon

Savings Accounts One of the safest places to put money FDIC Insured per depositor up to $250,000 Banks may reserve right to require up to 7 day notice to withdraw from account Statement savings Used to be passbook savings Monthly or quarterly statement sent or emailed Account activity details Interest earned Fees charged Low interest earned but high safety & liquidity

MMDAs Earns higher rate of interest than savings Usually need larger initial deposit to open Minimum balance requirement to avoid fees FDIC insured Money held by bank Bank invests your money in mutual funds Government & corporate securities

MMMFAs September 15, 2008, Lehman Brothers Holdings Inc. filed for bankruptcy. September 16, 2008, Reserve Primary Fund, the oldest money fund, broke the buck when its shares fell to 97 cents after writing off debt issued by Lehman Brothers.[10] The resulting investor anxiety almost caused a run on money funds, as investors redeemed their holdings and funds were forced to liquidate assets or impose limits on redemptions: through Wednesday, September 17, 2008, prime institutional funds saw substantial redemptions.[11][12] Retail funds saw net inflows of $4 billion, for a net capital outflow from all funds of $169 billion to $3.4 trillion (5%).[11] September 19, 2008, the U.S. Department of the Treasury announced an optional program to "insure the holdings of any publicly offered eligible money market mutual fund—both retail and institutional—that pays a fee to participate in the program". The insurance will guarantee that if a covered fund breaks the buck, it will be restored to $1 NAV.[12][13] This program is similar to the FDIC, in that it insures deposit-like holdings and seeks to prevent runs on the bank.[9][14] The guarantee is backed by assets of the Treasury Department's Exchange Stabilization Fund, up to a maximum of $50 billion. This program only covers assets invested in funds before September 19, 2008; those who sold equities, for example, during the recent market crash and parked their assets in money funds, are at risk. The program stabilized the system and stanched the outflows, but drew criticism from banking organizations, who expected funds to drain out of bank deposits and into newly insured money funds, as these later would combine higher yields with insurance.[9][14]

CDs Certificate offered by a bank, guaranteeing payment of a specified interest rate until designated date (maturity date) 7 days to 10 years (but usually < 18 months) Larger amount & longer terms = greater interest rate Some have variable rates Usually interest is higher than money market or savings rates Penalty for early withdrawal Safe—FDIC insured Not very liquid Consider maturity date when investing: If interest rates go up until maturity, CD won’t earn as much as other time deposits If interest rates go down, CD earns more than other deposits

Credit Unions Transaction accounts & time deposits are shares in the credit union Shareholders are owners Receive dividends Share-draft account = checking account Share account = savings account Share certificate = CD

Assignment List 3 types of time deposits. Which of them are exempt from reserve requirements? Imagine you have $1,000 to invest. Would you choose to put your money in a regular savings account at 3% interest, a money market deposit account at 4.5% interest, or a 12 month CD at 5% interest? WHY did you choose that one; what does it do for you?