Question

Consider the following reasoning: “How can checking account deposits be a liability to a bank? After all, they are something of value that is in the bank. Therefore, checking account deposits should be counted as a bank asset rather than as a bank liability. “ Do you agree or not? Why? Please explain in details.

Answer 1

Soln. Checking account is financial product that allows withdrawals and deposits of money. Checking account are liquid in nature in the sense, depositor can withdraw the money frequently through different means. Although, the money deposited by the customer is liable amount of the bank that it is liable to pay back to the customer but there are different means through which bank generates revenue from the checking accounts. Whatever money depositor deposits, bank is liable to pay that much and hence in this transaction bank is neutral. But there are ways through which bank makes revenue from the checking accounts, such as account opening fees, service charges, over draft protection fees, etc. Through these options, bank generates revenue and on the whole bank gets benefit from the checking accounts and hence they should be counted as asset to the bank and not as liability.