Core Deposits

By

Updated July 29, 2020

What Are Core Deposits?

Core deposits refer to deposits that form a stable source of funds for lending banks. Such deposits may be varied in nature, and can encompass small-denomination time deposits, payment accounts, as well as checking accounts. Core deposits are made in a bank's natural demographic market and offer numerous advantages to financial institutions, including predictable costs, and reliable gauges of customer loyalty. Core deposits are used in conjunction with brokered deposits to boost capital.

Key Takeaways

Core deposits are deposits involving small-time savings accounts, payment accounts, and checking accounts.
These deposits offer advantages such as predictable costs and customer loyalty measurement metrics.
Banks can utilize various methods, such as marketing tailored to the geographic region, in local communities to boost their core deposit funding amounts.

Understanding Core Deposits

Core deposits are insured by the Federal Deposit Insurance Corporation (FDIC) to the amount of up to $250,000. In addition to the aforementioned advantages, core deposits are generally less vulnerable to changes in short-term interest rates than certificates of deposit (CDs) or money market accounts. Financial institutions typically raise their CD rates in response to an increase in interest rates by the U.S. Federal Reserve. Consumers will look for higher rates in CDs, because this may enable them to swiftly ratchet up their savings. If some banks raise CD rates in accordance with the Federal policy, others may become motivated to follow suit, and likewise raise their own CD rates.

Methods For Increasing Core Deposits

Banks can increase their core deposits with local marketing campaigns and customer incentive programs. Furthermore, existing deposit customers can become strong sources for cross-selling opportunities. The act of building core deposits is similar to same-store sales growth, in that both revenue increases are organic in nature. Consequently, core deposits are viewed as an essential component to retail banks, which may otherwise struggle to remain afloat without them.

There are many methods of stimulating core deposits. These include:

Enhancing convenience by offering increased access to ATM networks.
Constructing additional bank branches.
Bolstering online services.
Increasing customer service via telephone.
Offering tailored services.
Competitively pricing products and services, including credit cards and wire transfers.
Generally offering best-in-class banking experiences.

Core Deposits and Accumulating Interest Payments

A negotiable order of withdrawal account (NOW) is an interest-earning bank account. In general commercial banks, mutual-savings banks, and savings-and-loan associations can offer NOW accounts to individuals, some nonprofit institutions, and certain governmental units. NOW accounts can be a method for growing core deposits.

Financial institutions are barred from paying interest on demand deposits, due to Regulation Q, a 1933 Federal Reserve Board law that restricts checking account interest payments. Instead, a bank may offer an account holder cash or credit payments, along with merchandise, when a patron opens an account. For a demand deposit, an account holder may not receive greater than two payments annually.

When interest rates are on the rise due to the Federal Reserve raising short-term rates as economies gather momentum, community banks are likely to face increased competition for low-cost core deposits from non-banks and regional banks, which pay higher interest rates.