Demand Deposit

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What is a 'Demand Deposit'

A demand deposit consists of funds held in an account from which deposited funds can be withdrawn at any time from the depository institution, such as a checking or savings account, accessible by a teller, ATM or online banking. In contrast, a term deposit is a type of account that cannot be accessed for a predetermined period of time. M1 is a category of the money supply that includes demand deposits as well as physical money and negotiable order of withdrawal (NOW) accounts that have no maturity period but limited withdrawals or transfers.

BREAKING DOWN 'Demand Deposit'

Demand deposits provide the money consumers need for paying daily expenses. If depositors were required to notify their financial institutions before withdrawing funds, the depositors would have challenges making everyday purchases and paying bills.

Characteristics of Demand Deposit Accounts

Demand deposit accounts (DDAs) may have joint owners. Both owners must sign when opening the account, but only one owner must sign when closing the account. Either owner may deposit or withdraw funds and sign checks without permission from the other owner.

Financial institutions typically create minimum balances for demand deposit accounts. Accounts falling below the minimum value typically are assessed a fee each time the balance drops below the required value.

NOW Accounts, MMAs and Demand Deposits

Although negotiable order of withdrawal (NOW) accounts and money market accounts (MMAs) let holders deposit and withdraw funds on demand and typically pay market interest rates, they are not DDA accounts. MMAs typically limit withdrawals, or transactions including deposits, withdrawals and transfers, to six per month. Fees may apply if the limit is exceeded.

Cash Reserves and Demand Deposits

The amount of cash reserves a financial institution is keeping either in its vault or deposited with the Federal Reserve depends on the amount of demand deposits the institution is holding. The greater the amount of demand deposits, the more cash the institution reserves.

Regulation Q and Demand Deposits

Federal Reserve Regulation Q prohibits financial institutions from paying interest on demand deposits. However, the institution may give an account holder cash or credit payments or merchandise when opening an account. The account holder may not receive more than two payments annually, and the value of each payment may not exceed $10 for deposits under $5,000 and $20 for deposits exceeding $5,000.

Example of a Demand Deposit

In July 2016, Bank First reported net income for the second quarter of 2016 of $3.76 million, or $0.60 per share. The numbers represented an 11% increase in quarterly earnings over the same quarter the previous year. The increase was partly due to growth in demand deposit balances, which are a low-cost source of funding for the bank.