What Is a Nonpersonal Time Deposit?
Like regulator time deposit accounts, nonpersonal time deposits are interest-bearing accounts with limitations regarding when funds can be withdrawn.
- Nonpersonal time deposits are time deposits held by corporations and other entities which are not natural persons.
- Like typical time deposits, they pay interest and require the deposited funds to remain within the account until the specified maturity date.
- Time deposits can be beneficial to banks because they are not included toward the bank's reserve requirements.
Understanding Nonpersonal Time Deposits
Nonpersonal time deposits are interest-bearing accounts used by depositors, such as corporations, who are not natural persons. They typically pay modest amounts of interest at fixed time intervals and for a specified period of time.
When the specified term has ended, the money may either be withdrawn or it may be redeposited for another term. Money may not be withdrawn before the time deposit has reached maturity, or an early withdrawal penalty will be incurred. Generally speaking, a bank needs at least 30 days' notice of a withdrawal from a nonpersonal time deposit account.
According to Section 204.2 of Regulation D, nonpersonal time deposits must be subject to a minimum early withdrawal penalty if their maturity period is 1.5 years or longer. Moreover, the penalty in question must be equal to at least 30 days' worth of simple interest on the amount withdrawn from the time deposit, and it must be imposed on any withdrawals taken between six days after the date of deposit and 1.5 years after the date of deposit.
Certificates of Deposit
Certificates of deposit (CDs) are sometimes referred to as time deposits, but strictly speaking, a CD can be more easily liquidated than a time deposit.
As with other interest-bearing accounts, the longer money is left in the account, the more interest will be collected by the depositor. The returns associated with time deposits are generally higher than those of simple savings accounts, although they are generally lower than those of stocks or bonds, on a long-term basis. Other instruments, such as market-linked guaranteed investment certificates (GICs), provide returns similar or greater to those of most time deposits while also guaranteeing the principal invested.
One of the principal reasons that time deposits generally offer higher interest than savings accounts has to do with the reserve requirements of the bank. Under the Federal Reserve's Regulation D, nonpersonal time deposits are not subject to reserve requirements. This means that the bank is free to invest the deposited funds liberally, prior to the maturity date.
Real World Example of a Nonpersonal Time Deposit
As the owner of XYZ Industries, Emma fulfills her corporate banking requirements at a local bank called ABC Financial. Given her conservative temperament, Emma regularly invests her company's earnings in nonpersonal time deposits held at ABC.
These accounts are held in the name of XYZ Industries. Because XYZ is a corporation and not a natural person, these accounts therefore qualify as nonpersonal time deposits. Accordingly, ABC is free to invest the deposited funds without any impact on its reserve requirements.
From Emma's perspective, the term deposits offer a low-risk investment that offers interest greater than that given by her company's savings accounts. In exchange, she recognizes that she will not be able to withdraw the deposited funds until their maturity period is reached.