A bank deposit is a savings account, current account, or other type of bank account with a banking institution that allows the account holder to deposit money into the account and withdraw it from the account. These operations are reflected in the accounting books of the bank, and the resulting balance is recorded as a bank liability and represents the amount of bank debt to the customer. Some banks may charge for this service, while others may pay customers interest on the funds deposited.
The main types of bank deposits for individuals
Current accounts (deposits)
A deposit account with a bank or other financial institution in order to reliably and quickly provide frequent access to demand funds through various channels. Since money is available on request, these accounts are also called call accounts or current accounts, with the exception of some cases.
Current account provides various flexible payment methods that allow customers to transfer their funds directly. Most current accounts provide the option of direct deposit or withdrawal or payment through a debit card. Current accounts provide two different ways in which money can be lent: overdraft and offsetting mortgages.
In the UK, almost all current accounts offer a pre-agreed overdraft size, which is determined depending on the client’s income and credit history. Overdraft can be used at any time without the consent of the bank and can last indefinitely. Despite the fact that overdraft can be resolved, the money is technically repayable at the request of the bank or within a certain period. In reality, such a rare phenomenon as overdraft is usually profitable for the bank and expensive for the client.
Mortgage loan offset is a type of mortgage that is common in the UK and used to purchase household property, the key principle of which is to reduce the amount of overpayment on a mortgage loan. This can be achieved using one of two methods: either the lenders provide one account for all the borrower’s operations (often referred to as a current mortgage account) or they make several accounts available that allow borrowers to conditionally divide their money by purpose, but all balances the accounts will shift each day relative to each other, with the opportunity to reduce the interest paid on the mortgage debt.
Money market account
The money market account is a deposit account on which interest is paid, and for which a notification is required when withdrawing funds after a short period of time (or not). In the United States, this type of demand deposit is subject to federal savings account instructions, for example, a monthly limit is regulated.
Money Market Account (MMA) or Money Market Deposit Account (MMDA) assumes interest payments, which are determined based on current interest rates in the money market.
Money market accounts tend to have relatively high interest rates, but require a higher minimum balance (from $ 1,000 to $ 25,000) in order to earn these interest or avoid monthly payments. As a result, the investment strategy for working with such accounts is usually similar to and competes with the money market fund offered by the broker. These two types of accounts are otherwise unrelated.
Savings accounts are those opened by commercial banks for which interest is paid, but they cannot be used directly as money (for example, to issue a check). Although they are not so convenient to use as current accounts, these accounts allow customers to hold liquid assets and at the same time receive cash rewards. For a bank, money in a savings account does not entail reserve requirements, and therefore can be used for commercial purposes.
In the United States, the term “savings account” includes a deposit or account that complies with legal requirements and in accordance with the terms of the deposit agreement or depository practice, the depositor has the right to make up to six pre-authorized transfers or withdrawals per month, or a term statement at least four weeks. There is no regulation limiting the number of deposits in an account.
In most European countries, interest on deposit accounts is taxed at the source of payment. Heavy taxes in some countries have led to the development of a significant savings offshore industry. The European Union Savings Directive obliged offshore financial centers to provide any interest information for use with EU tax authorities or withholding tax on interest paid on offshore accounts due to concerns about potential tax evasion. Account holders must pay tax or provide account holder information to the appropriate tax authorities.
Withdrawing money from a savings account is sometimes expensive and takes more time than withdrawing from a current account. However, most savings accounts do not limit withdrawals, unlike deposit certificates. When withdrawing from online accounts, the main problem is the time required for the automated clearing house to transfer funds to an online account in a “non-chain” bank, where the amount can be easily accessible. In the period between when funds are withdrawn via the Internet bank and transferred to a local bank, interest is not charged.
Some financial institutions only offer online savings accounts. They usually pay higher interest rates, and sometimes impose higher security restrictions. Online access has opened the accessibility of offshore financial centers to the general public.
Term deposit (deposit)
A term deposit is a cash deposit in a banking institution that cannot be canceled for a fixed period or period of time. When the term ends the term deposit can be withdrawn or it can be extended for a new term. The longer the term, the higher the percentage of the deposit.
Analogs of the term deposit are the deposit certificate in the USA, the conditional deposit in Canada, Australia and New Zealand; bond (bond) in the UK; term deposit in India and in some other countries.
In a strict sense, a certificate of deposit differs from a term deposit in terms of negotiability: certificates of deposit are negotiable and can be sold at a discount when the holder needs liquidity, while term deposits usually must be kept until the end of the term.
The rate of return for fixed deposits is higher than for savings accounts, because the ability to hold funds in your accounts for a certain period gives the bank the opportunity to invest in higher-end financial products. However, the profitability of a term deposit is usually lower on average long-term than investments in more risky products, such as stocks or bonds.
A term deposit is a bank deposit, the interest on which has a given maturity date. Funds are deposited in a savings institution in accordance with an agreement that (a) funds must be kept for a certain period of time, or (b) the institution may require a minimum period of time after notifying the customer of the desire to withdraw funds before funds will be made.
“Small” term deposits are defined in the United States as deposits of less than $ 100,000, while “large” term deposits are made of $ 100,000 or more. In the United States, banks are not subject to reserve requirements for their term deposits.
A demand deposit is a deposit account that allows you to withdraw money without paying a fee or a fine and without notifying the bank. The interest rate on demand deposits is usually lower than that of term deposits, but the minimum deposit amount is usually less.
Regulatory framework for the opening of deposits
Subject to the restrictions established by the conditions of the account, the account holder (customer) retains the right to pay his money on demand. The client may or may not be able to deposit money into an account using a check, internet banking or other channels, depending on conditions.
Banking terms “depositing” and “withdrawing funds” mean that a customer deposits money into the account and accepts money from the account. From a legal point of view and a financial accounting point of view, the term “deposit” is used in the banking industry in financial statements to describe a bank’s debt to its depositor, and not the funds that a bank holds as a result of its deposit, which are shown as bank assets.
For example, a depositor opened a bank account in the United States, depositing $ 100 in cash and obtaining ownership of $ 100 in cash, which becomes an asset to the bank. In bank books, the bank writes its currency and coins to the debit of the account as $ 100 in cash and credits the liability account for liabilities (the so-called demand deposit account, current account, etc.) for the same amount.
In the audited financial statements of the bank, $ 100 in currency will be shown on the balance sheet as an asset of the bank on the left side, and the deposit account will be shown as liabilities due to the bank to its client on the right side of the balance sheet. The financial statements of the bank reflect the economic nature of the transaction in which the bank borrowed $ 100 from its depositor and pledged to repay this amount to the client in accordance with the terms of the agreement. To compensate for the liability on this deposit, the bank currently owns the deposited funds and shows these funds as an asset of the bank. These “physical” reserve funds may be held as deposits at the central bank, on which interest is calculated in accordance with monetary policy.
As a rule, the bank does not hold the entire amount of deposits in reserve, but lends most of the money to other customers. This allows banks to earn interest on the asset and, therefore, pay interest on deposits.
By transferring ownership of deposits from one side to another, banks can avoid using cash as a method of payment. Commercial bank deposits make up most of the money supply currently in use. For example, if a bank in the United States provides a loan to a client by depositing borrowed funds on the client’s current account, the bank usually records this event by debiting the assets account on the bank’s balance sheet and credits deposit liabilities or the client’s current account on the bank balance sheet. From an economic point of view, the bank creates economic money (although not legal tender). The client’s account balance does not actually represent cash, as demand deposits are simply the responsibility of banks for their customers. In this way,
Banking Deposit Regulation
The activities of banks, as a rule, are subject to state regulation in order to reduce the risk of bankruptcy of a credit institution. Regulation can also have the goal of reducing the scale of depositors’ losses in the event of a bank failing. Banking regulation is a form of government regulation that imposes certain requirements, restrictions and principles on banks. This regulatory framework creates transparency between banking institutions and private individuals and the corporations with which they do business.
Given the interconnectedness of the banking industry and the confidence that the national (and global) economy rests on banks, it is very important for regulators to maintain control over the standardized practices of these institutions. Proponents of such regulation often built their arguments on a “too big to fail” concept. It is argued that many financial institutions (in particular, investment banks with a commercial division) have too much control over the economy to go bankrupt without huge consequences. This is a prerequisite for public injections, in which state financial assistance is provided to banks or other financial institutions that are on the verge of collapse.
There is a conviction that without this help, troubled banks will not only become bankrupt, but will create a chain of effects throughout the economy, leading to a system failure.
The objectives of banking regulation, and the emphasis, vary in different jurisdictions. The most common goals are:
- Prudence – reduce the level of risk faced by bank lenders (i.e. to protect depositors).
- Reducing systemic risk – reduce the risk of failure as a result of unfavorable terms of trade for banks, which can cause multiple or major bank failures.
- Avoid abuses of banks – reduce the risk of using banks for criminal purposes, for example, to launder the proceeds of crime.
- Bank secrecy protection.
- Loan distribution – direct loans to privileged sectors.
- Honest customer service and corporate social responsibility.
Banking rules may vary widely between countries and jurisdictions. Requirements are made to banks to help achieve the goals of the regulator. Often these requirements are closely related to the level of exposure to a particular sector of a bank. The most important minimum requirement in banking regulation is to maintain minimum capital adequacy ratios. To some extent, US banks have some freedom in determining who will control and regulate them.
Banks are required to work with the regulator’s banking license in order to conduct business as a bank, and the regulator monitors licensed banks for compliance and responds to violations of the requirements by issuing orders, imposing fines or revoking the license from the bank.
The regulator requires banks to publicly disclose financial and other information, and depositors and other lenders can use this information to assess risk and make investment decisions. As a result, the bank adheres to market discipline, and the regulator can also use market pricing information as an indicator of a bank’s financial health.
The system of insurance of deposits of individuals
Bank deposits can also be insured under the deposit insurance scheme, if applicable in the country of the depositor. Deposit insurance is a measure introduced in many countries to protect depositors of banks, in full or in part, from losses caused by the inability of a bank to make payments on its obligations within a specified period. Deposit insurance systems are one of the components of the financial system safety net, which contributes to financial stability.
Banks are allowed (and, as a rule, encouraged) to issue loans or invest most of the money from bank deposits, instead of simply keeping the full amount secure. If many of the bank’s borrowers are unable to repay their loans on time, the bank’s creditors, including depositors, are at risk of losing their savings. Therefore, investors tend to quickly withdraw funds from a bank in a difficult financial situation before its insolvency. Because a banking institution has the potential for failure, and the massive collapse of banks can cause a wide range of harmful events, including an economic downturn, deposit insurance is supported in many countries to protect depositors and ensure that their funds are not at risk.
Deposit insurance was first applied to protect small banks in the United States. Banks were limited in location and thus did not benefit from economies of scale, networking. To protect local banks in the poorest states, the federal government created a deposit insurance system.
Many national deposit insurers are members of the International Association of Deposit Insurers (IADI), an international organization established to promote the stability of financial systems by facilitating international cooperation and encouraging international contacts between deposit insurers and other interested parties. Deposit insurance organizations (agencies) are for the most part managed by the government or created as a division of the central bank, while some of them are private enterprises with state support or completely private.
There are a number of countries with more than one deposit insurance system – Austria, Canada (Ontario and Quebec), Germany, Italy, and the USA.
On the other hand, one deposit insurance system may cover more than one country: for example, many banks in the Marshall Islands, the Federated States of Micronesia and Puerto Rico are insured by the Federal Deposit Insurance Corporation. Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea and Gabon also work in the same system.
Opening an account. What you need to know
If you decide to keep money in the bank, then you need to know how to open an account ? Firstly, any opening of an account is accompanied by a contract, so when you visit a bank, you need to bring your passport with you. Secondly, of course, it will take some amount of money. Thirdly, you must be at least 14 years old. And fourthly, you need to determine the purpose of opening an account, if only income is a fixed deposit, and if salary or pension is received, this will be a current account. Further, in the case of a term deposit, it is necessary to determine the period of investment and other deposit conditions.