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December 13, 2018 

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TIME DEPOSITS:

Interest-paying bank accounts maintained by traditional commercial banks, credit unions, savings and loan associations, and mutual savings banks with a minimum time (at least seven days) before deposited funds can be withdrawn. Time deposits come in one of two varieties: (1) savings deposits and (2) certificates of deposit. The minimum time period prevents these accounts from functioning as demand deposits and being widely used as money. Time deposits, along with money market mutual funds, are added to M1 to derive M2.
Time deposits are bank savings accounts with a minimum time requirement before the funds can be withdrawn. In some cases (standard savings accounts), the time requirement is not rigidly enforced. In other cases (certificates of deposit), it is. When enforced, withdrawal of funds before the designated time period results in an interest penalty--a reduction in the interest rate.

The two common types of time deposits are savings deposits and certificates of deposit. Saving deposits include standard savings accounts, passbook accounts, share drafts, and money market deposits. Certificates of deposit pay higher interest rates that normal savings accounts, but require the funds not be withdrawn for a specified time period.

Time Deposits in M2

M2
June 2004 (Billions)

ComponentAmount

M1$1,335.2
Near Monies4,957.5
Savings Deposits
and Money Market Deposits
3,408.3
Small Denomination
Time Deposits
792.2
Money Market
Mutual Funds
757.0

Total M2$6,292.7

The table to the right presents recent values for M2 and its two key components, M1 and near monies. Contained with the near monies category are time deposits. Savings deposits (including share deposits, passbook accounts, and money market deposits) are the largest category totalling $3.4 trillion dollars. Certificates of deposit, labeled as "Small Denomination Time Deposits" in the table are almost $800 billion.

Savings Deposits

Savings deposits are standard savings accounts or passbook accounts offered by traditional commercial banks, savings and loan associations, and mutual savings banks. Share drafts at credit unions and money market deposits at all types of banks are also included in this category.

Savings deposits have a legal time requirement of at least seven days, which is seldom enforced. Unlike certificates of deposit, there is no explicit maturity date on savings deposits. These deposits also have limits on the number of withdrawals per month, often with a minimum amount per withdrawal.

Certificates of Deposit

Certificates of deposit are accounts with an explicit maturity date after the date deposit and which typically pay a higher interest rate than that found with standard savings accounts. Maturity dates can range from one week to several years. Longer maturity dates invariably correspond with higher interest rates. If the deposits are withdrawn prior to the maturity date, then an interest penalty is imposed, that is, the interest rate paid on the deposit is reduced.

Certificates of deposit are so name because in the days before computerized record-keeping, depositors received an actual certificate, a document, stipulating the terms of the deposit--maturity date and interest rate.

Liquidity Plus

Time deposits fill an important niche in the world of banking services. First, they provide customers with a significant degree of liquidity. Time deposits are NOT money and are NOT widely used as a medium of exchange. But they can be easily and quickly converted to currency or checkable deposits. Second, time deposits store wealth for customers and provide banks with a pool of funds that can be used for loans. The minimum time requirements gives banks some degree of assurance that the funds will be available for lending.

<= TIGHT MONEYTOTAL COST =>


Recommended Citation:

TIME DEPOSITS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: December 13, 2018].


Check Out These Related Terms...

     | savings deposits | certificates of deposit | money market deposits | money market mutual funds | Eurodollars | repurchase agreements | demand deposits | 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 | M2 | M1 | saving | liquidity | banks | financial markets |


And For Further Study...

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


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