Core Deposits

Core Deposits are used mostly in the banking industry as bank's gross or total dollar value of deposit. The most common this term is connected with bank's savings, checking, and time deposit accounts. According to John L. Cleary II "Core deposits are of particular importance to banks because they provide a low cost source of funds". Core deposits term is a basic tool when it comes to funding motrgages.

Core deposits at the bank

According to Timothy W. Koch, S.Scott MacDonald "Banks with large amount of funding from core deposits similarly have better liquidity than banks without significant core deposit". Core deposits are more dependent on fees charged, services rendered and location of the banks than on interest rate. If core deposits are bigger in the funding mix then there is less chance for unexpected deposit withdrawals. Mainly there are two types of business strategies, one of them contains core deposits.

1. "Traditional banks" possess a big supply of excess core deposits because core deposits are less sensitive to fluctuations in market interest rates and external finance premium is significantly lower. These banks have a business strategy of giving loans in subprime groups with core deposit funding.
2. "Market-based banks" are financed from managed commitments.

Core deposits intangible asset

Bank acquisitions accounted for under the purchase method of accounting are using core deposit intangible asset. GAAP (Generally Accepted Accounting Principles) proclaim that acquisition is accounted for on the books of the acquirer by putting down the fair values of the assets acquired and the current value liabilities assumed. The item which was putting down generally has tangible and intangible assets. Core deposits are not legally restricted. One of the advantages of a core deposit is that it is based on long-term and stable customer relationships. So that the bank can expect the funds to be used for many years. If the bank has a good relationship with the customer, it is possible to expect cooperation over a longer period of time.

Examples of Core Deposits

• Checking Accounts: A checking account is a deposit account held at a financial institution that allows for withdrawals and deposits. These accounts allow customers to deposit funds, withdraw funds, write checks, make payments, and transfer money.
• Savings Accounts: Savings accounts are deposit accounts held at a financial institution that allows customers to deposit money and earn interest on those funds. These accounts typically have higher interest rates than checking accounts and allow for limited withdrawals.
• Time Deposits: Time deposits are interest-bearing deposit accounts that require a customer to keep the funds in the account for a predetermined period of time. These deposits usually have higher interest rates than savings accounts and may require a minimum balance.
• Money Market Accounts: Money market accounts are deposit accounts offered by financial institutions that allow customers to deposit and withdraw funds while earning interest on their balance. These accounts typically have higher interest rates than checking and savings accounts, but require a higher minimum balance to avoid fees.

Advantages of Core Deposits

Core deposits are an important component of a banking institution’s financial health, offering a range of advantages. These include:

• Core deposits provide a stable source of funding for a bank, as customers tend to keep their funds in the bank for longer periods of time. This reduces the amount of capital the bank needs to obtain from other sources, such as issuing bonds or taking out loans.
• Core deposits are considered to be less risky than other sources of funding, such as the stock market, which can be volatile. This makes them attractive to investors, which helps to increase the financial stability of the bank.
• Core deposits provide a steady stream of income for the bank, as customers are typically charged fees for processing transactions or maintaining their accounts. This helps to create a more sustainable financial model.
• Core deposits can also help to build customer loyalty, as customers may be more likely to stay with a bank if they feel their funds are safe and secure. This can help to increase the number of customers that the bank has, which can lead to increased profits.

Limitations of Core Deposits

Core deposits are a valuable source of funding for banks, but they do have some limitations. These include:

• Low returns: Core deposits typically generate lower returns than other investments, such as bonds and stocks.
• Reduced liquidity: Since core deposits are not as easily transferrable as other investments, banks can have difficulty accessing funds when they need them.
• Increased regulatory scrutiny: Core deposits are subject to increased regulatory scrutiny due to their large dollar amount and potential for misuse.
• Lack of diversification: Core deposits are not as diversified as other investments and can leave banks exposed to specific risks.

Other approaches related to Core Deposits

Core Deposits represent an important source of capital for banks and other financial institutions. Other approaches related to Core Deposits include:

• Transaction Accounts: These are accounts held by customers from which they can withdraw funds at any time, typically known as checking or demand deposit accounts.
• Savings Accounts: These accounts allow customers to save money for the long-term and usually earn a small amount of interest.
• Money Market Accounts: These accounts are typically offered by banks and credit unions and offer higher interest rates than traditional savings accounts.
• Certificates of Deposit (CDs): These are time deposits that offer higher interest rates than traditional savings accounts, but require customers to keep their money in the account for a fixed period of time.

In summary, Core Deposits are an important source of capital for banks and other financial institutions and can include transaction accounts, savings accounts, money market accounts, and certificates of deposit.

Core Deposits — recommended articles

Quick assets — External sources of finance — Cash and cash equivalents — Capital Base — Brokered deposit — Non current liability — Debenture Redemption Reserve — Personal assets — Held to maturity securities

References

• Black L. (2009), Core Deposit Funding of Subprime Mortgages and the Effect of Monetary Policy Board of Governors of the Federal Reserve System Washington, DC 20551, August 2009
• Cleary II J.L. (1990), Core Deposit Base: Goodwill or Not Goodwill - Is That the Question? Catholic University Law Review, Volume 39, Issue 3 Spring 1990, Article 6
• Koch T.W. (2014), Bank Management Eighth Edition, Cengage Learning, United States of America 2014
• Thornton F.A. (1989), Bank Core Deposit Intangibles: A Conceptual View, Accounting Horizons Sarasota, Tom 3, Nr/wydanie 2, June 1989
• Whalen R.C. (2011), What is a Core Deposit and Why Does It Matter? Legislative and Regulatory Actions Regarding FDIC-insured Bank Deposits Pursuant to the Dodd-Frank Act Networks Financial Institute At Indiana State University

Footnotes

Author: Aleksandra Majcher