Core Deposits

Core deposits are the deposits that form a stable source of funds for a lending bank. Core deposits are made in a bank's natural demographic market and offer many advantages to financial institutions, such as predictable costs, and a measurement of how loyal their customers are.

In addition to the advantages mentioned above, core deposits are generally less vulnerable to changes in short-term interest rates than certificates of deposit (CDs) or money market accounts. As the U.S. Federal Reserve gradually begins to raise rates, moving ahead in 2018, some financial institutions have increased their CD rates, accordingly. Consumers will look for higher rates in CDs (as this could enable them to increase their savings more quickly). If some banks raise CD rates in accordance with the Federal policy, others could follow.

Core deposits also encompass small denomination time deposits, as well as checking accounts.

Banks can increase their core deposits with local marketing and customer incentives. Existing deposit customers can be strong sources for cross-selling opportunities. Increasing core deposits is similar to building same-store sales growth, a form of organic revenues. It can be almost impossible to sustain an effective retail bank without a culture of deposit gathering and growth.

Enhancing convenience (proximity of additional branches and/or ATM networks, along with facilitating online and/or over-the-phone banking opportunities), offering best-in-class customer service (including tailored, specific advice to current, and potential depositors), and offering competitively priced products such as credit cards and wire transfers can all be tools for building out a base of core deposits.

A negotiable order of withdrawal account (NOW) is an interest-earning bank account. In general commercial banks, mutual-savings banks, and savings-and-loan associations can offer NOW accounts to individuals, some nonprofit institutions, and certain governmental units. NOW accounts can be a method for growing core deposits.

Regulation Q still prohibits financial institutions from paying interest on demand deposits, however. Instead, a bank may offer an account holder cash or credit payments, along with merchandise when opening an account. For a demand deposit, an account holder may not receive greater than two payments annually.