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
expense per unit
of deposit
service
Estimated
overhead expense
allocated to the
bank’s deposit
function
Planned profit
from each
deposit service
unit sold
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
deposit
100
10
15
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%