Money market account

Last updated

A money market account (MMA) or money market deposit account (MMDA) is a deposit account that pays interest based on current interest rates in the money markets. [1] The interest rates paid are generally higher than those of savings accounts and transaction accounts; however, some banks will require higher minimum balances in money market accounts to avoid monthly fees and to earn interest.

Contents

Money market accounts should not be confused with money market funds, which are mutual funds that invest in money market securities.

Germany


Features

Money market accounts are regulated under terms similar to ordinary savings accounts. They are insured by the FDIC (unlike money market funds), and although they may provide checking services, the restrictions of Federal Reserve Regulation D discourage their use for day-to-day payment purposes. In practice, money market accounts are distinguished from ordinary savings accounts by their higher balance requirements and their more complex interest rate structure.

History

The Depository Institutions Deregulation and Monetary Control Act of 1980 set in motion a series of steps, designed to phase in the deregulation of bank deposits, permitting a wider variety of account types, and eventually eliminating interest ceilings on deposits. By the subsequent Garn–St. Germain Depository Institutions Act of 1982, on December 14, 1982, money market accounts were authorized with a minimum balance of no less than $2,500, no interest ceiling, and no minimum maturity, allowing up to six transfers out of the account per month (no more than three by check) and unlimited withdrawals by mail, messenger, or in person. [2] Minimum denominations were eliminated on January 1, 1986, and the limitation that no more than three of the maximum six monthly outward transfers could be by check was eliminated on May 3, 1988.

Related Research Articles

Federal Reserve Central banking system of the United States

The Federal Reserve System is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.

Federal Deposit Insurance Corporation US company providing deposit insurance

The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that provide deposit insurance to depositors in U.S. depository institutions, the other being the National Credit Union Administration, which regulates and insures credit unions. The FDIC is a United States government corporation providing deposit insurance to depositors in U.S. commercial banks and savings banks. The FDIC was created by the 1933 Banking Act, enacted during the Great Depression to restore trust in the American banking system. More than one-third of banks failed in the years before the FDIC's creation, and bank runs were common. The insurance limit was initially US$2,500 per ownership category, and this was increased several times over the years. Since the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2011, the FDIC insures deposits in member banks up to US$250,000 per ownership category.

Money supply total amount of monetary assets available in an economy at a specific time

The money supply is the total value of money available in an economy at a point of time. There are several ways to define "money", but standard measures usually include currency in circulation and demand deposits. Each country’s central bank may use its own definitions of what constitutes money for its purposes.

Fractional-reserve banking banking system where bank holds reserves equal to fraction of deposit liabilities

Fractional-reserve banking is the most common form of banking practised by commercial banks worldwide. It involves banks accepting deposits from customers and making loans to borrowers, while holding in reserve an amount equal to only a fraction of the bank's deposit liabilities. Bank reserves are held as cash in the bank or as balances in the bank's account at the central bank. The minimum amount that banks are required to hold in liquid assets is determined by the country's central bank, and is called the reserve requirement or reserve ratio. Banks usually hold more than this minimum amount, keeping excess reserves.

A transaction account, also called a checking account, chequing account, current account, demand deposit account, or share draft account at credit unions, is a deposit account held at a bank or other financial institution. It is available to the account owner "on demand" and is available for frequent and immediate access by the account owner or to others as the account owner may direct. Access may be in a variety of ways, such as cash withdrawals, use of debit cards, cheques (checks) and electronic transfer. In economic terms, the funds held in a transaction account are regarded as liquid funds. In accounting terms they are considered as cash.

Federal funds rate interest rates to maintain banks Federal Reserve balance in the U.S.

In the United States, the federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis. Reserve balances are amounts held at the Federal Reserve to maintain depository institutions' reserve requirements. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. The federal funds rate is an important benchmark in financial markets.

A savings and loan association (S&L), or thrift institution, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans. The terms "S&L" or "thrift" are mainly used in the United States; similar institutions in the United Kingdom, Ireland and some Commonwealth countries include building societies and trustee savings banks. They are often mutually held, meaning that the depositors and borrowers are members with voting rights, and have the ability to direct the financial and managerial goals of the organization like the members of a credit union or the policyholders of a mutual insurance company. While it is possible for an S&L to be a joint-stock company, and even publicly traded; in such instances it is no longer truly a mutual association, and depositors and borrowers no longer have membership rights and managerial control. By law, thrifts can have no more than 20 percent of their lending in commercial loans — their focus on mortgage and consumer loans makes them particularly vulnerable to housing downturns such as the deep one the U.S. experienced in 2007.

The savings and loan crisis of the 1980s and 1990s was the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995: the Federal Savings and Loan Insurance Corporation (FSLIC) closed or otherwise resolved 296 institutions from 1986 to 1989 and the Resolution Trust Corporation (RTC) closed or otherwise resolved 747 institutions from 1989 to 1995.

The reserve requirement is a central bank regulation employed by most, but not all, of the world's central banks, that sets the minimum amount of reserves that must be held by a commercial bank. The minimum reserve is generally determined by the central bank to be no less than a specified percentage of the amount of deposit liabilities the commercial bank owes to its customers. The commercial bank's reserves normally consist of cash owned by the bank and stored physically in the bank vault, plus the amount of the commercial bank's balance in that bank's account with the central bank.

In the United States, federal funds are overnight borrowings between banks and other entities to maintain their bank reserves at the Federal Reserve. Banks keep reserves at Federal Reserve Banks to meet their reserve requirements and to clear financial transactions. Transactions in the federal funds market enable depository institutions with reserve balances in excess of reserve requirements to lend reserves to institutions with reserve deficiencies. These loans are usually made for one day only, that is, "overnight". The interest rate at which these deals are done is called the federal funds rate. Federal funds are not collateralized; like eurodollars, they are an unsecured interbank loan.

Regulation Q is a Federal Reserve regulation which sets out capital requirements for banks in the United States. The current version of Regulation Q was enacted in 2013.

Depository Institutions Deregulation and Monetary Control Act

The Depository Institutions Deregulation and Monetary Control Act of 1980 is a United States federal financial statute passed in 1980 and signed by President Jimmy Carter on March 31. It gave the Federal Reserve greater control over non-member banks.

Excess reserves

In banking, excess reserves are bank reserves in excess of a reserve requirement set by a central bank.

In the United States, a negotiable order of withdrawal account is a deposit account that pays interest on which an unlimited number of checks may be written.

The Expedited Funds Availability Act was enacted in 1987 by the United States Congress for the purpose of standardizing hold periods on deposits made to commercial banks and to regulate institutions' use of deposit holds. It is also referred to as Regulation CC or Reg CC, after the Federal Reserve regulation that implements the act. The law is codified in Title 12, Chapter 41 of the US Code and Title 12, Part 229 of the Code of Federal Regulations.

Bank regulation in the United States is highly fragmented compared with other G10 countries, where most countries have only one bank regulator. In the U.S., banking is regulated at both the federal and state level. Depending on the type of charter a banking organization has and on its organizational structure, it may be subject to numerous federal and state banking regulations. Apart from the bank regulatory agencies the U.S. maintains separate securities, commodities, and insurance regulatory agencies at the federal and state level, unlike Japan and the United Kingdom. Bank examiners are generally employed to supervise banks and to ensure compliance with regulations.

Bank Financial institution that accepts deposits

A bank is a financial institution that accepts deposits from the public and creates Demand Deposit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords.

Reserve Requirements for Depository Institutions is a Federal Reserve regulation that limits monthly withdrawals from savings accounts at banks in the United States. It also formerly set reserve requirements for banks.

A deposit account is a savings account, current account or any other type of bank account that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the bank and represents the amount owed by the bank to the customer. Some banks may charge a fee for this service, while others may pay the customer interest on the funds deposited.

Re-intermediation in banking and finance can be defined as the movement of investment capital from non-bank investments, back into financial intermediaries. This is usually done in efforts to secure depository insurance on the capital, during times of high risk and volatility in market interest rates. Conceptually, reintermediation can be thought of as an answer to disintermediation, which is the movement of investment funds away from financial intermediaries into other investments. Disintermediation occurs naturally, as competition from different financial firms can allow for higher investment yield, which causes funds to flow away from depository institutions.

References

  1. Dlabay, Les R.; Burrow, James L.; Brad, Brad (2009). Intro to Business. Mason, Ohio: South-Western Cengage Learning. p. 482. ISBN   978-0-538-44561-0.
  2. Gilbert, Alton, "Requiem for Regulation Q: What It Did and Why It Passed Away", Federal Reserve Bank of St. Louis, February 1986