Encyclopedia of Investment Terminology

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Bank Deposits

Deposits, whether time, savings, or demand, are another common form of investment. The deposits could be in another institution or in the commercial department of the bank under examination. Oftentimes, such investments provide the safety and liquidity needed by the account. However, given the availability of numerous other investment vehicles providing similar safety and liquidity, examiners should determine whether deposit holdings result from a lack of management initiative to seek other investment opportunities. Large holdings of non-interest bearing deposits should be scrutinized, since it is a fiduciary's duty to make trust assets productive. Discretionary deposits with the commercial bank should also be reviewed, given the conflict of interest and self-dealing aspects of such investments.

Some trust departments sweep cash to the commercial department's deposit accounts on an overnight basis, rather than sweep to an external investment vehicle. In those situations, bank management should have a strategic plan for the activity. Within that plan, management should not view overnight trust funds as a long-term funding source for the commercial department. Management should have calculated the costs, including interest on deposits and the FDIC deposit insurance assessment. More importantly, trust management should be able to demonstrate that the customer is at least as well compensated, as he would have been with an external sweep, usually a money market fund. Care should also be taken to assure the deposit account is appropriated titled in the commercial department's records to insure pass-through deposit insurance coverage.

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