Question

1) Why do you think Non-transaction deposits have gained such popularity over the past 30 years while checkable deposits have lost popularity? Remember these are Liabilities of the bank.

2) Assume that the First National Bank shown in the T-accounts is the only bank in the country, besides the Federal Reserve and the bank has No Excess reserves. Assume the person who took out this loan used the money to buy a $90 piece of equipment (it's why people take out loans) and the seller of the equipment deposited the money back into this bank (remember its the only bank in the country)...Explain what would happen to the bank's assets and liabilities if the bank 'meets their 10% Reserve Requirement" and loans out what's left!!! Draw out a T-account if it'll help! Be very thoughtful!

Answer 1

(1): Non-transaction deposits are those deposits that cannot be withdrawn or transferred to third parties using different means of instructions like telephonic transfers or through checks. Non-transaction deposits have gained popularity over the past 30 years as it gives banks more financial leeway to use funds as per their requirements. The amounts of non-transaction deposits are subject to restrictions and the depositor have restrictions to transact using them and the restrictions are in the form of transaction limitations and transaction fees. Such restrictions are used to prevent the deposit amount from being used as a primary transactional account. Non-transaction deposits have gained popularity over the past 30 years as it is beneficial to both the banks as well as the depositors. The banks gain as they get access to funds that are free to be used by them. Banks are also not required to hold any reserves against non-transactional deposits. The depositors gain as non-transaction deposits enable them to build on their savings in a tangible and systematic manner.

Checkable deposits have lost popularity as banks have to hold a reserve against these deposits. Depositors can write a check or a draft against checkable deposits and hence banks cannot loan out the entire amount of checkable deposits in a manner that is desirable for them. The use of funds from checkable deposits is more restricted and constrained from the point of view of banks. The actions and behaviors of depositors also have led to reduction in popularity of checkable deposits as depositors find this method of building savings less systematic than non-transaction deposits.