Types of Accounts
Cash accounts include:
- US and foreign currency and coin on hand or in transit
- Clearings
- Cash items
Due From Banks – bank assets that consist of demand and time deposits maintained in
other banks to facilitate the transfer of funds
- Each bank should establish a policy to maintain cash balances at the minimum levels
necessary to serve its customers.
- Part 326 requires procedures for safekeeping of currency be established
- Clearings are; checks, drafts, notes and other items a bank has cashed or received for
deposit that are drawn on other local banks, and cleared directly with them.
- Proof – proving of work
- Transit – sending out of town cash items for collection
- Objectives of proof and transit system are the same:
- Forward items for collection so that funds are available as soon as possible
- Distribute all incoming checks and deposits to their destinations
- Establish whether deposits totals balance with the totals shown on deposit tickets
- Prove the totals of general ledger entries and other transactions
- Collect data for computing the individual customer’s service charges and
determining the availability of customer’s funds
- Accomplish the assigned functions at the lowest possible cost
- Common practice is to post all properly encoded debit items, regardless of whether an
overdraft is created
- Overdraft list should be reviewed and unapproved items should be reversed and
separated as returned items.
Cash Items
- Checks or other items in process of collection payable in cash upon presentation.
- Cash items are usually in the custody of one employee at each banking office.
- Cash items not in the process of collection should be included in other assets.
- Items not immediately payable in cash upon presentation
- Items not paid when presented
- Require further collection effort after a predetermined amount of time
Due From Banks – Demand Balances
Correspondent bank balances that enable the transfer of funds between banks (resulting
from the collection of cash items and cash letters) the transfer and settlement of securities
transactions, the transfer of participating loan funds, the purchase or sale of Federal
Funds, and many other causes
Due From Banks – Time Balances
Time balances with any bank which are not subject to immediate withdrawal but have the
usual time account restrictions
Banks utilize other bank’s to provide certain services
Compensating Balance – minimum balance established for a bank (A) to maintain
when another bank (B) performs services for the bank (A)
- Reciprocal Interbank Deposits – occur when two banks maintain deposit accounts
with each other.
- When these deposit relationships involve demand deposits, the net effect should
be shown in the examination report.
- Reciprocal time balances should be shown gross
Deposit Notes
Purchased as investments
- Similar to negotiable time certificates of deposits (CD), structured like corporate
bonds, five-day corporate settlement period for purchases, semi-annual interest
payments. Maturities vary from 9 months to 15 years
- Issues tend to be rated
- Included on the balance sheet in interest bearing balances due from banks (asset
category), UNLESS
- If the note does not contain a statement referring to the note as a deposit liability,
the bank should treat the note as a security or a loan
Structured CDs
- Customized typically containing embedded options or having cash flows linked to
various indices
- Investment in structured CDs warrant heightened supervisory attention due to
- May contain:
- Step-up features with call options
- Inverse floaters or dual indices
- Severe early withdrawal penalties
- Lack of established secondary market
- Classification of structured CDs should be consistent with the adverse classification
guidelines for securities
Primary Reserves
- Consist of cash and demand balances due from other bank.
- Represent a bank’s most liquid assets, except to the degree that they comprise a
bank’s required or statutory reserves.
- To little of reserve hurts liquidity, to much reserve hurts earnings
Policies and Procedures on Interbank Liabilities
Regulation F
- Covers all credit exposure to a correspondent
- Established details for creating policy
- Board must review policy annually
- Quarterly review of correspondent financial conditions
- Bank should limit overnight credit exposure to a correspondent to 25% of the exposed
bank’s capital, unless the bank can demonstrate that its correspondent is at least
adequately capitalized. (No limits for credit exposure to adequately or wellcapitalized correspondents)
Aggregate of demand, time due from and Federal Funds sold to one correspondent
that equals or exceeds 100% of Tier 1 capital should be listed as a concentration
- UNLESS, the excess funds are:
- Collateralized by US Treasury or US Government agencies
- Backed by US Government obligations
- US Government fully guarantees
- Object is to inform
Compensating Balances
- Part 349 requires executive officers and principal shareholders (including their related
interest) to report annually the terms and amounts of their indebtedness to
correspondent banks to their respective Board
- Purpose is to aid in the determination of preferential lending practices