Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Deposit

What it is:

In the finance world, a deposit is the placement of funds in an account with a bank or other financial institution. Many people also use the term to refer to a refundable down payment made to ensure that a future transaction occurs.

How it works (Example):

In the banking world, there are two general types of deposits: demand deposits and time deposits. Demand deposits are the placement of funds into an account that allows the depositor to withdraw his or her funds from the account without warning or with less than seven days' notice. Checking accounts are demand deposits. They allow the depositor to withdraw funds at any time, and there is no limit to the number of transactions a depositor can have on these accounts (although this does not mean that the bank cannot charge a fee for each transaction).

A time deposit is an interest-bearing deposit held by a bank or financial institution for a fixed term whereby the depositor can withdraw the funds only after giving notice. Time deposits generally refer to savings accounts or certificates of deposit, and banks and financial institutions usually require 30 days' notice for withdrawal of these deposits. Individuals and companies often consider time deposits as "cash" or readily available funds even though they are technically not payable on demand. The notice requirement also means that banks may assess a penalty for withdrawal before a specified date. Time deposits may pay higher interest rates than demand deposits.

Why it Matters:

Demand deposits at commercial banks are part of the M1 money supply calculated by the Federal Reserve. Time deposits below $100,000 are included in the Federal Reserve's M2 money supply measure, and time deposits above $100,000 are included in the M3 money supply. The Federal Reserve currently does not place reserve requirements on savings deposits and CDs, but the amount of demand deposits an institution has often dictates all or part of the reserves it must keep on hand either in vault cash or on deposit with the Federal Reserve; the more dollars an institution has in demand deposits, the more dollars it must keep in reserves.

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