The necessity of deposits in banking system
Today banks play a great role in the financial system of a country. So, there has been created a strong bank financial system that to serve in market economy in a developing countries.The banking system in an economy is analogous to the heart in the human body structure and the capital it provides can be likened to blood that circulates in it.
Similarly if finance is not provided to any economic sector, it will suffer and that sector will eventually fail. However, the ability to provide the relevant financing is dependent on the ability of the banks to mobilise adequate amount of deposits in the economy and other foreign sources of funding.
The commercial banks help in mobilizing savings through network of branch banking. People in developing countries have low incomes but the banks induce them to save by introducing variety of deposit schemes to suit the needs of individual depositors. They also mobilize idle savings of the few rich. By mobilizing savings, the banks channelize them into productive investments. Thus they help in the capital formation of a developing country. Bank deposits are a common occurrence in which customers deposit funds into their accounts. The bank must provide cash to the customer whenever funds are withdrawn; if not withdrawn, however, banks will typically use the funds as investments or loans to other customers until the depositor makes a withdrawal.
Financial institutions provide the system through which savers deposit their money and borrowers can access those resources. The process by which deposits are transformed by the banking sector into real productive capital is at the core of financial intermediation.
Bank deposits consist of money placed into a banking institution for safekeeping. Bank deposits are made to deposit accounts at a banking institution, such as savings accounts, checking accounts and money market accounts. The account holder has the right to withdraw any deposited funds, as set forth in the terms and conditions of the account. The «deposit» itself is a liability owed by the bank to the depositor (the person or entity that made the deposit), and refers to this liability rather than to the actual funds that are deposited. [1]
Banks ensure the efficient transformation of mobilised deposit funds into productive capital.
Domestic deposits traditionally provide a cheap and reliable source of funds for development, which is of great value developing countries, especially when the economy has difficulty raising capital in international markets.
Studies around the world have shown that banks should fund more of their loan books with customer deposits in order to stand more robustly against liquidity squeezes and contribute to the stability of the banking system.
When banks resort less deposit funding and rely more on open market funding this is widely seen as negative for financial stability. Market funding requires that the bank continually rolls over bills and bond issues and renews its borrowings from other financial institutions.
The most important deposit products are those that make it easier for clients to turn small amounts of money into «useful lump sums» enabling them to smooth consumption and mitigate the effects of economic shocks. These are typically provided by banks in the form of savings accounts.
Any decline in amount of deposits at the banks raises important questions about whether the banks will be able to remain successful and meet the credit needs of the economy.
Banks will typically experience a temporary liquidity dips due to a decline in the amount of deposits. The most important step for banks in addressing this problem would be to develop strategies that are consistent with the needs of the savers in the economy. When the deposit base in the economy shrinks, banks will respond in a variety of ways.
Banks will become aggressive in maintaining their local base of depositors and the underlying customer relationships. Banks will offer incentives to depositors in the form of higher interest rates and other attractive conditions in order to retain depositors on their books.
Many banks will look for other funding sources and will compete more directly for market based funds. In this respect interbank funding becomes an option.
The banks also look at ways of creating new funding sources and better ways to manage banking assets.
An option that banks can adopt is to lend on a more selective basis whenever funds are tight — either by raising credit standards or increasing loan rates and fees.
Although this strategy could result in better credit quality and perhaps higher net interest margins as loan demand increases, it could also mean curtailing the amount of credit extended to creditworthy customers.
It is important to keep in mind that every time one makes a deposit with the bank, they are providing part of the lifeblood for the economy as it is deficit units of the economy that benefit from the actions of depositors.
Bank deposits are a common occurrence in which customers deposit funds into their accounts. The bank must provide cash to the customer whenever funds are withdrawn; if not withdrawn, however, banks will typically use the funds as investments or loans to other customers until the depositor makes a withdrawal. This process is significant in regards to money supply, and has several ramifications.
Historically, economists had trouble deciding how bank deposits fit into the money supply. After all, different banking systems chose different ways to represent deposits either through actual assets, such as silver and gold or through only records. These systems changed over time with the creation with more accurate methods of accounting. This led to some differences in economic theory on how to treat bank deposits, especially in the beginning. By the 1900s, however, most economists agreed that deposits and bank notes alike had to be considered part of the money supply.
Deposits are not only a part of the money supply, they also affect it in important ways. Governments create and spread money throughout the economy in response to key movers like investment. Investment is largely possible because people can move large sums of money by saving, transferring and withdrawing funds from bank accounts. Bank deposits are a primary tool for investment, and without them businesses would not be able to access funds from individuals at all. [2]
The knowledge that their savings are protected gives small depositors confidence in the banking system as a whole. If one bank has a problem, the deposit insurance scheme will reassure depositors in other banks that there is no need to panic. Most countries do indeed insure small depositors — with limits ranging from negligible sums in some countries to $100,000 in the United States and even higher in Italy. A reasonably high limit gives an incentive for individual and small-business depositors to save and protects the retail payments system. And the pressure is off small depositors to try to keep track of their bank’s health — which of course would be hard for them.
Unlike small depositors, large depositors have the resources to monitor the condition of their banks and thus — if there is to be market discipline — do not need unlimited protection for their funds. To avoid interfering with the working of the financial market, large depositors should not be encouraged to count on the insurance system to bail them out if they fail to pay attention to the soundness of their deposits. Therefore, the amount that can be insured needs a cap and conditions should be set out that will in effect limit coverage for large depositors. The system should state whether the cap will apply to each and every deposit at a failed bank, to the sum of all of a depositor’s separate accounts at a failed bank, or to the sum of all accounts owned by an individual depositor at all banks that fail during a given period. The system also needs to determine whether it will protect deposits in foreign currencies. The size of the cap will influence the extent of demands placed on the system. A small cap will protect most individuals, but not corporations with access to information on a bank’s condition. [3]
Nowadays types of deposits in banking system can be summarized as follows: demand deposits, time deposits and savings accounts. Demand deposits, bank money or scriptural money are funds held in demand deposit accounts in commercial banks. These account balances are usually considered money and form the greater part of the narrowly defined money supply of a country. Demand deposits are usually considered part of the narrowly defined money supply, as they can be used, via checks and drafts, as a means of payment for goods and services and to settle debts. The money supply of a country is usually held to consist of currency plus demand deposits. In most countries, demand deposits account for a majority of the money supply. [4]
A time deposit is a money deposit at a banking institution that cannot be withdrawn for a certain term or period of time (unless a penalty is paid). [5]
Saving accounts are accounts maintained by retail financial institutions that pay interest but cannot be used directly as money in the narrow sense of a medium of exchange. These accounts let customers set aside a portion of their liquid assets while earning a monetary return. For the bank, money in a savings account may not be callable immediately and, in some jurisdictions, does not incur a reserve requirement. Cash in the bank's vaults may thus be used, for example, to fund interest-paying loans. [6]
Banking institutions in our republic also provide many types of deposits for customers. Most common used types of deposits in Uzbekistan can be summarized as follows:
Demand deposit;
Time deposit;
Savings account.
Based in the international practice, it can be suspected that new types of deposits to be adopted in our country. In particular money market deposits can be proposed as it provides opportunities for attracting additional funds in to banking sector.
References:
- http://www.investopedia.com/terms/b/bank-deposits.asp
- Tyler Lacoma: http://www.ehow.com/
- Gillian Garcia: https://www.imf.org/
- Krugman, Paul R., and Robin Wells. Economics. New York: Worth, 2006. Print.
- https://en.wikipedia.org/
- Budden, Robert; Cumbo, Josephine (7 July 2006). Financial Times. Retrieved 28 November 2010.
