Topic 7: Management of Commercial Bank Sources of Funds

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Topic 7 Management of Commercial Bank Sources of
Funds

• Types of deposit
• Pricing of deposits
• management of nondeposit sources of funds

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Types of Deposits

• There are variety of deposits offer by banks and
  other deposit-taking institutions to customers
• Transaction (Payments or Demand) Deposits are
  subject to immediate withdrawals by customers
  either in person or by a third party designated
  by the customers.
• They may be in the form of nonointerest bearing
  or interest bearing
• Noninterest-bearing regular checking accounts.
• Interest-bearing negotiable order of withdrawal
  (NOW), money market deposit accounts (MMDAs).
• Nontransaction Passbook savings deposits, time
  deposits, CDs, retirement savings accounts, etc.

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Pricing of Deposits

• Deposit pricing strategy helps banks to price
  their deposit services in such a way that will
  lead to attraction of funds and generate profits.
• Deposits pricing techniques include cost plus
  profit margin marginal cost pricing and total
  customer relationship pricing
• Cost Plus profit Margin technique this
  formula emphasizes the use of unbundled service
  pricing, breaking deposits into different
  categories.
• - the cost plus pricing fomula is giving as
• Unit price Operating Estimated overhead
  Planned
• Charged the expense
  expense allocated profit margin
• Customer for each per unit of to
  the deposit from each
• Deposit service deposit service
  service function service unit sold
• (1)

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• The application of the cost-plus pricing requires
  that banks are able estimate deposit service
  costs by
• - calculate the cost rate of each source of
  funds
• - multiply each cost rate by the relative
  proportion of all funds coming from that
  particular source and
• - sum all resulting products to derive the
  weighted average cost of all funds raised. This
  implies the pooled-funds cost approach.
• Marginal Cost technique the use of extra cost
  of sourcing additional funds/deposits.
• Marginal cost Change in total cost New
  interest rate x Total
• funds raised at new rate Old interest
  rate x Total
• funds raised at old rate (2)

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• Marginal cost rate Change in total cost
• Additional funds raised (3)