Demand deposits, also known as current deposits or checking accounts, are a type of deposit held in banks that offer immediate access to funds without any significant restrictions on withdrawal. They are an essential component of the money supply and play a vital role in the modern banking system. Here are detailed notes on demand deposits:
1. Nature of Demand Deposits: Demand deposits are considered highly liquid and readily available for withdrawal by depositors upon request. Account holders can access their funds through various means, such as writing checks, using debit cards, or making electronic transactions.
2. Features of Demand Deposits:
- No Fixed Maturity: Unlike time deposits (e.g., fixed deposits), demand deposits do not have a specific maturity date. Account holders can withdraw funds at any time without incurring penalties.
- No Withdrawal Restrictions: Banks do not impose restrictions on the number of withdrawals or the amount of funds that can be withdrawn from demand deposit accounts.
- Low or No Interest: Demand deposit accounts typically offer lower or no interest rates compared to time deposits since they provide a high level of liquidity and convenience for depositors.
- Check Writing: One of the primary features of demand deposits is the ability to write checks against the account balance, enabling easy payment to third parties.
3. Types of Demand Deposit Accounts:
- Checking Accounts: These are standard demand deposit accounts commonly used for everyday transactions. They allow unlimited withdrawals and offer check-writing privileges.
- Negotiable Order of Withdrawal (NOW) Accounts: NOW accounts are similar to checking accounts but may pay interest on the account balance.
- Money Market Deposit Accounts (MMDAs): While technically considered a type of savings account, MMDAs offer check-writing capabilities and typically pay higher interest rates than traditional checking accounts.
4. Role in the Money Supply: Demand deposits are an essential component of the money supply in an economy. The money supply comprises currency in circulation and various types of deposits held in banks. Demand deposits represent the portion of the money supply that is immediately accessible for transactions and payments.
5. Reserve Requirements and Fractional Reserve Banking: Banks are required to maintain a certain percentage of their demand deposits as reserves, which is determined by central banks. This is known as the reserve requirement. The rest of the deposits can be used by banks for lending and investment purposes under the fractional reserve banking system.
6. FDIC Insurance: In many countries, including the United States, demand deposits held in banks are typically insured by the government up to a certain limit. In the U.S., the Federal Deposit Insurance Corporation (FDIC) provides deposit insurance to protect depositors against bank failures.
7. Importance to Banks: Demand deposits are a crucial source of funding for banks. Banks use these deposits to provide loans and credit to customers, thereby stimulating economic activity and promoting growth.
In summary, demand deposits are highly liquid accounts that provide account holders with convenient access to their funds for daily transactions and payments. These accounts play a fundamental role in the money supply, support the lending activities of banks, and provide depositors with a secure and accessible means of holding their money.