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    Pricing of Deposit

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    Mahmudur Rahman
    CHAPTER 12 Managing And Pricing Deposit Services This chapter has multiple goals: To learn about the different types of deposits banks and their competitors offer To discover which types of deposits are among the most profitable to offer their customers To explore how an institution’s cost of funding can be determined and To examine the different methods open to institutions to price the deposits and deposit-related services they sell to the public. One of the primary Concerns of Fund Mana

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    Pricing of Deposit

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    Mahmudur Rahman
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    CHAPTER 12 Managing And Pricing Deposit Services This chapter has multiple goals: To learn about the different types of deposits banks and their competitors offer To discover which types of deposits are among the most profitable to offer their customers To explore how an institution’s cost of funding can be determined and To examine the different methods open to institutions to price the deposits and deposit-related services they sell to the public. One of the primary Concerns of Fund Mana

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    CHAPTER 12 Managing And Pricing Deposit Services This chapter has multiple goals: To learn about the different types of deposits banks and their competitors offer To discover which types of deposits are among the most profitable to offer their customers To explore how an institution’s cost of funding can be determined and To examine the different methods open to institutions to price the deposits and deposit-related services they sell to the public. One of the primary Concerns of Fund Mana

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    1K views20 pages

    Pricing of Deposit

    Uploaded by

    Mahmudur Rahman
    CHAPTER 12 Managing And Pricing Deposit Services This chapter has multiple goals: To learn about the different types of deposits banks and their competitors offer To discover which types of deposits are among the most profitable to offer their customers To explore how an institution’s cost of funding can be determined and To examine the different methods open to institutions to price the deposits and deposit-related services they sell to the public. One of the primary Concerns of Fund Mana

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 20

    CHAPTER 12

    Managing And Pricing Deposit Services


    This chapter has multiple goals: To learn about the different types of deposits banks and their competitors offer To discover which types of deposits are among the most profitable to offer their customers To explore how an institutions cost of funding can be determined and To examine the different methods open to institutions to price the deposits and deposit-related services they sell to the public.

    One of the primary Concerns of Fund Management Strategy is


    Liability Management

    Goal

    Acquire funds at low cost

    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Chain Impact
    Inadequate Sources or High Cost sources of fund Lack of funds or costly funds available for lending Low volume of assets and low margin Low level of Profit
    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Broad Sources of Funds

    Deposit

    Borrowing Bank Capital

    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Managing Sources of Funds Deposit Services

    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Two key issues that every bank/FIs must deal


    Where can the bank raise funds at the lowest possible cost?
    How can management ensure that the bank always has enough deposits to support the desired volume of loans and other financial services demand by the public?
    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Types of Deposits
    1. Transaction (Payments/ Demand) Deposits
    The transaction, or demand deposit service requires the bank to honor immediately any withdrawals made

    I. Non-interest bearing demand deposit Pays no explicit interest Provide payment, safekeeping, drawing checks II. Interest bearing demand deposit Bank may require prior notice before withdrawal Pay some interest

    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Types of Deposits
    2. Non transaction Deposits: Time Deposits Time deposits carry fixed maturity dates (usually covering 30, 60, 90, or 180 days) with fixed interest rates. Time deposits generally carry a minimum maturity of days and cannot be withdrawn before that.

    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Interest Rates on Deposits Depend On:


    The Maturity of the Deposit The Size of the Offering Institution The Risk of the Offering Institution Marketing Philosophy and Goals of the Offering Institution
    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Core Deposits
    A Stable Base of Funds that is Not Highly Sensitive to Movements in Market Interest Rates and Which Tend to Remain with the Bank

    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Cost Plus Profit Deposit Pricing

    Estimating Unit Price Operating Planned Overhead Charged the Expense Profit from Expense Customer = Per Unit of + + Each Allocated to for Each Deposit Service Unit the Deposit Service Service Sold Function

    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Historical Average Cost Approach


    Determines the Banks 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

    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Pooled Funds Approach


    Determine the Banks Cost of Funds by Looking at the Future. What minimum Rate of Return is the Bank Going to Have to Earn on Any Future Loans and Securities to Cover the Cost of all New Funds Raised?

    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Using Marginal Cost to Set Interest Rates on Deposits


    Many Financial Analysts Would Argue That the Added Cost (Not Weighted Average Cost) of Bringing New Funds into the Bank Should Be Used to Price Deposits.

    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    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.
    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Upscale Target Pricing


    Bank Aggressively Goes After HighBalance, Low-Activity Accounts. Bank Uses Carefully Designed Advertising to Target Established Business Owners and Managers and Other High Income Households.

    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Relationship Pricing
    The Bank Prices Deposits According to the Number of Services Purchased or Used. The Customer May Be Granted Lower Fees or Have Some Fees Waived If Two or More Services are Used. Relationship Banking
    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    Basic or Lifeline Banking


    Some People Feel That All Individuals Are Entitled to a Minimum Level of Financial Services No Matter Their Income Level

    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    CALCULATING COST OF FUND Average Approach =

    Interest Cost
    Deposit + Non- Deposit Funds

    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

    CALCULATING COST OF FUND Marginal Approach =

    Interest Cost
    Deposit + Non- Deposit Funds

    McGraw-Hill/Irwin Bank Management and Financial Services, 6/e

    2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

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