What are Core Deposits? Definition, Calculate, 5 Facts

Local banks and credit unions rely mostly on their core deposits for funding.

In general, core deposits range in size from smaller sources like individual consumer savings accounts to bigger ones like company checking and money market accounts.

The provision of loans to depositors is one of the primary uses of core deposits.

What are Core Deposits?

Core deposits are deposits that provide lending banks with a constant stream of money. These deposits can be of many types, including small-denomination time deposits, payment accounts, and checking accounts.

What are Core Deposits?

Core deposits are made in a bank’s native demographic market and provide various benefits to financial organizations, such as predictable expenses and dependable measures of client loyalty. To increase capitalization, both core deposits and brokered deposits are employed.

Understanding Core Deposits

The Federal Deposit Insurance Corporation (FDIC) insures core deposits for up to $250,000 per depositor. In addition to the aforementioned advantages, core deposits are often less subject to changes in short-term interest rates than certificates of deposit (CDs) or money market accounts.

Financial institutions generally boost their CD rates in reaction to a rise in interest rates by the U.S. Federal Reserve. Consumers will hunt for greater rates in CDs, because this may enable them to fast ramp up their savings.

What are Core Deposits?

If some banks boost CD rates in accordance with the Federal policy, others may get encouraged to follow suit, and also raise their own CD rates.

Methods For Increasing Core Deposits

Local marketing initiatives and reward packages for customers can help banks raise their core deposits. In addition, current deposit clients can be an excellent source of cross-selling possibilities.

The act of accumulating core deposits is analogous to the rise of same-store sales in that both revenue increases are organic in nature. As a result, core deposits are seen as a vital component for retail banks, which would struggle to survive without them.

There are several techniques of activating core deposits. These include:

  • Enhancing convenience by enabling more access to ATM networks.
  • Constructing extra bank branches.
  • Bolstering internet services.
  • Increasing customer service via telephone.
  • Offering personalized services.
  • Competitively priced products and services, including credit cards and wire transfers.
  • Generally giving best-in-class banking experiences.

What are Core Deposits?

Core Deposits and Accumulating Interest Payments

A bank account that earns interest is a negotiable order of withdrawal account (NOW).

Generally speaking, commercial banks, mutual savings banks, and savings-and-loan organizations can provide NOW accounts to people, some nonprofit institutions, and some governmental entities. NOW accounts can be used to increase the size of your core deposits.

Regulation Q, enacted in 1933 by the Federal Reserve Board, forbids financial institutions from paying interest on demand deposits.

Instead, a bank may give cash or credit payments in addition to items when a customer establishes an account. An account holder with a demand deposit cannot receive more than two payments per year.

When interest rates are on the rise owing to the Federal Reserve increasing short-term rates as economies gain speed, community banks are likely to encounter more competition for low-cost core deposits from non-banks and regional banks that offer a higher rate of interest.

What are Core Deposits?

Calculation of Core Deposits

Suppose that we have n depositor accounts, and we collect their end-of-month balance for some period of time T, for example, 2 years (T=24 months), 5 years (T=60 months) or 10 years (T=120 months).

The length of such a period of time should as long as the available data permits, given that all of it describes the current economic scenario. Let X_{ij} be the end-of-month balance for depositor i for month j. Hence for depositor i, we have the following time series of balances:

  \begin{equation*} X_{i1},X_{i2},\cdots,X_{iT} \end{equation*}

We take the first difference of this series to obtain the monthly changes in the end-of-month balances for depositor i:

  \begin{equation*} X_{i2}-X_{i1},X_{i3}-X_{i2},\cdots,X_{iT}-X_{i,T-1} \end{equation*}

Let us relabel such a series as:

  \begin{equation*} Y_{i1},Y_{i2},\cdots,Y_{i, T-1}\mbox{ where }Y_{ij}=X_{i, j+1}-X_{ij} \end{equation*}

Let us consider the 1-month ahead change Y_{i,T} in the balance of depositor i. We assume that this follows the discrete uniform distribution on the range  Y_{i1},Y_{i2},\cdots,Y_{i, T-1}. Now let us consider the 2-month ahead change Y_{i,T}+Y_{i,T+1} in the balance of deposits i.

We assume that this is sum of two independent discrete uniformly distributed random variables each having a range Y_{i1},Y_{i2},\cdots,Y_{i, T-1}. This pattern is carried on, until we obtain the distribution of all the monthly changes for a required future horizon.

The 1-month ahead change in the total deposits is given by: Y_{1,T}+Y_{2,T}+\cdots + Y_{n,T}, where n is the total number of depositors. This is actually the sum of n discrete uniformly distributed random variable have a distinct range as stated above.

What are Core Deposits?

The 2-month ahead change in the total deposits is given by: Y_{1,T}+Y_{2,T}+\cdots + Y_{n,T}+Y_{1,T+1}+Y_{2,T+1}+\cdots + Y_{n,T+1}, and so on. It follows that for some positive integer k, the k-month ahead total deposits balance is equal to:

  \begin{equation*} \sum_{i=1}^{n} X_{iT}+\sum_{j=1}^{k} Y_{1,T+j-1}+\sum_{j=1}^{k} Y_{2,T+j-1}+\cdots + \sum_{j=1}^{k} Y_{n,T+j-1} \end{equation*}

We will use simulation techniques in order to simulate the distributions of the k-month ahead total deposits balances, from which we will derive the core deposits as their percentiles.

Let us start with the distribution of the 1-month ahead change in the total deposits is given by: Y_{1,T}+Y_{2,T}+\cdots + Y_{n,T}. Recall that the distribution of each Y_{i,T} is discrete uniformly distribution on the range Y_{i,1},Y_{i,2},\cdots,Y_{i,T-1}, for  i \in\lbrace 1,2, \cdots, n\rbrace.

Hence the sequence Y_{i,1},Y_{i,2},\cdots,Y_{i,T-1} can be taken as the empirical distribution of Y_{i,T}. However for a more stable simulation we will use the sequence:

  \begin{equation*} Y_{i,1},\cdots,Y_{i,1}, Y_{i,2},\cdots,Y_{i,2}\cdots,Y_{i,T-1}\cdots Y_{i,T-1} \end{equation*}

As the empirical distribution of Y_{i,T}.

We derive the empirical distribution of the 1-month ahead balance for customer i, namely X_{iT}+Y_{i,T}, by computing:

  \begin{equation*} X_{iT}+Y_{i,1},\cdots,X_{iT}+Y_{i,1}, X_{iT}+Y_{i,2},\cdots,X_{iT}+Y_{i,2}\cdots,X_{iT}+Y_{i,T-1}\cdots X_{iT}+Y_{i,T-1} \end{equation}

And replace the negative numbers by 0, because we assume that the deposit accounts can never have a negative balance.

We estimate the distribution of the 1-month ahead total balance \sum_{i=1}^{n} X_{iT}+Y_{1,T}+Y_{2,T}+\cdots + Y_{n,T} from the distributions of X_{iT}+Y_{i,T} (for all i\in\lbrace 1,2,\cdots, n \rbrace) by using Latin Hypercube Sampling as follows.

Consider a random permutation of each empirical distribution of the random variable X_{iT}+Y_{i,T} for all i\in\lbrace 1,2,\cdots, n \rbrace.

By adding these n permutations component-wise, we obtain the empirical distribution of the 1-month ahead total balance. The \alpha% 1-month core deposits amount is equal to the (1-\alpha)^{th} percentile of this empirical distribution.

Next we estimate the distribution of the 2-month ahead total balance \sum_{i=1}^{n} X_{iT}+\sum_{j=1}^{2} Y_{1,T+j-1}+\sum_{j=1}^{2} Y_{2,T+j-1}+\cdots + \sum_{j=1}^{2} Y_{n,T+j-1}.

First let us consider each customer one-by-one. We have already obtained the empirical distribution of the 1-month ahead balance for customer i denoted by the random variable X_{iT}+Y_{i,T}.

By using Latin Hypercube Sampling again, we add (component-wise) a permutation of the empirical distribution of Y_{i,T} to the empirical distribution of X_{iT}+Y_{i,T}.

Then we replace the negative numbers by 0 and this will result in the empirical distribution of the 2-month ahead balance for customer i. By summing  (the permutations of ) the  empirical distributions of each customer will result in the distribution of the 2-month ahead total balance.

What are Core Deposits?

Its (1-\alpha)^{th} percentile will represent the \alpha% 1-month core deposits amount. Such method is extended to obtain the \alpha% 3-month, 4-month etc… core deposits amounts.

This entire process of determining the core deposits for various time periods is done several times, and the provided core deposits numbers are the averages derived from all simulations. This will assist the model to converge and deliver stable results.


Small-time savings accounts, payment accounts, and checking accounts are examples of core deposits.

These deposits provide advantages such as cost predictability and KPIs for measuring consumer loyalty. Locally, banks can increase their core deposit funding through a variety of means, including as geographically-targeted marketing.

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