Final answer:
The calculated cost (%) of the Bank's noninterest bearing deposit should not necessarily be 0% because banks incur costs to maintain these accounts and must also comply with reserve requirements that prevent them from using all deposited funds for income-generating activities.
Step-by-step explanation:
The calculated cost (%) of a bank's noninterest bearing deposit should not necessarily be 0%. Even though these deposits do not pay interest, banks often incur costs to provide the services associated with these accounts, such as customer service and account maintenance. Additionally, regulatory requirements, like the reserve requirements set by the Federal Reserve, compel banks to hold a fraction of deposits, such as 10% of total deposits, which could otherwise be used to earn income through loans or investments. The cost of holding these required reserves is an opportunity cost to the bank and is considered an indirect cost of offering noninterest bearing deposits.
It's important to note that banks can still use their deposits to become a financial intermediary between savers and borrowers by loaning out funds that are not required to be kept on reserve. Singleton Bank, in the hypothetical example, must keep $1 million on reserve and can loan out the remaining $9 million, earning interest income that helps offset the costs associated with noninterest bearing deposits.
Moreover, at times when interest rates are near zero, as they were after the 2008-2009 recession, the cost of maintaining noninterest bearing deposits is closer to the cost of interest-bearing deposits because banks are paying minimal interest on deposits. Nonetheless, a bank's business model is structured to make a profit by earning more on loans and investments than the interest it pays out, including the costs associated with the upkeep of all types of deposit accounts.