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RISK PREMIUM: This has two very closely related uses. First, it's what risk averse people are willing to pay to avoid a risky situation. For example, if you would be equally happy with a guaranteed $900 or a 50-50 chance of getting either $500 or $1,500, then you're risk premium is $100. Second, it's the extra percentage points added to an interest rate to compensate for the risk of a loan. As a general rule, each 1 percent chance of default on a loan adds a risk premium of about 1 percent to the interest rate.

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SHARE DRAFT ACCOUNTS:

Interest-paying checking accounts maintained by credit unions. These function much like standard demand deposit checking accounts in that the funds can be withdrawn "on demand" by writing a check, but an interest is paid on the outstanding balance. Share draft accounts are one type of checkable deposits. Others are demand deposits (standard checking accounts), negotiable order of withdrawal (NOW) accounts, and automatic transfer service (ATS) accounts.
Share draft accounts are checkable deposits, or checking accounts, offered by credit unions that pay an interest on the balance. The interest paid on the balance is usually variable, depending on market conditions, and requires a minimum balance. Share draft accounts are something of a cross between standard demand deposit checking accounts and standard savings accounts.

Credit unions are nonprofit depository institutions that function much like traditional commercial banks, but which are mutually owned by the depositors. The depositors are often employees of a particular company or work in the same occupation. The mutual ownership of credit unions is why checkable deposits are termed "share" drafts.

Some Recent Numbers

M1
June 2004 (Billions)

ComponentAmount

Currency$676.8
Checkable Deposits650.7
Demand Deposits321.6
Other Checkable
Deposits: Banks
187.2
Other Checkable
Deposits: Thrifts
141.9
Nonbank
Travelers Checks
7.7

Total M1$1,335.2

The table to the right presents values for M1 and its key components, currency and checkable deposits, for selected years. The "Other Checkable Deposits: Thrifts" category contains credit union share drafts.

A New Kid on the Block

Share draft accounts are relatively new to the financial landscape, dating back only to the 1970s. These accounts were first offered by credit unions as a means of competing with traditional commercial banks. At that time traditional commercial banks were the only institutions that could legally offer checking accounts (demand deposits).

In fact, these accounts were termed "share drafts" in large part to circumvent banking regulations that existed when they were first issued. The "share" part of share drafts indicate that this is an account at a mutually owned credit union. The "draft" part of share drafts is really nothing more than a common euphemism for "check." In the banking world, "check" and "draft" are basically synonymous. Credit unions did NOT issue "checking accounts," they issued "share drafts."

With high rates of inflation and high interest rates, banking customers looked for ways to retain liquidity (as in spendable money) while also generating interest payments. Share draft accounts were offered to meet this need and to attract deposits to credit unions banks. While such accounts skirted existing banking regulations they became legal in the 1980s.

A Couple of Others

Share draft accounts are one type of interest-paying checking account that emerged in the 1970s. Two others are NOW accounts and ATS accounts.
  • NOW Accounts: Savings and loan associations and mutual savings banks issued what they termed NOW accounts--negotiable order of withdrawal. A "negotiable order of withdrawal" is essentially another term for "check." While these were basically checking accounts, an interest was paid on the balance of funds.

  • ATS Accounts: To remain competitive with the interest-paying "checking accounts" offered by their depository competition, traditional commercial banks began offering automatic transfer services (ATS) accounts. This involved the automatic transfer of funds from a savings account to a checking account to process checks. This service allowed banks to pay interest on the balance of the savings account, even though the savings account effectively functioned as a checking account.
While demand deposits were once the only checking account option and continue to account for half of the checkable deposits issued by traditional commercial banks and other depository institutions, share draft accounts play a significant role in the M1 money supply. Together with NOW accounts and ATS accounts, these "other" checkable deposits are almost one-forth of the M1 money supply.

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Recommended Citation:

SHARE DRAFT ACCOUNTS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: December 17, 2018].


Check Out These Related Terms...

     | checkable deposits | demand deposits | negotiable order of withdrawal accounts | automatic transfer service accounts | currency | Federal Reserve notes | near monies | plastic money |


Or For A Little Background...

     | money | money functions | medium of exchange | M1 | saving | liquidity | banks | financial markets | business |


And For Further Study...

     | money creation | fractional-reserve banking | banking | Federal Reserve System | monetary economics | monetary base | monetary policy | debit card | monetary economics |


Related Websites (Will Open in New Window)...

     | National Credit Union Administration |


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