ACFI 2005 Finance.

3. A customer has approached your commercial bank seeking to invest funds for a period of six months. The customer is particularly worried about risk following the GFC and the market volatility that continues to characterise world financial markets. Explain the features of call deposits, term deposits and CDs to the customer and provide advice on risk-reward trade-offs that might be associated with each product.
Answer: Commercial banks are the main type of financial institution operating in all major international financial systems. They control a significant proportion of the financial asset within the financial system. Recently, the majority of developed economies have significantly reduced the level of bank regulation and there has therefore been a considerable growth in the commercial bank sector. Following the GFC, this deregulatory phase was criticised for having contributed to the crisis. Thus, it is natural for the customer to be worried about risk following the GFC and the market volatility that continues to characterise world financial markets.
Since the core function of commercial banks is to gather savings from depositors and investors and use those funds in the provision of loans to customers this customer’s approached towards our commercial bank seeking to invest funds for a period of six months can be recognised.
Call deposits- call or demand deposits are funds held in a savings account that can be withdrawn on demand. Features of call deposits are: * They are held in accounts other than a cheque account where the funds are available on demand. These types of accounts are generally referred to as savings account. * They may take the form of the traditional passbook account, whereby the depositor holds a physical passbook that provides a record of all transactions and funds held. * Call deposit account holders