Question

To ascertain if sufficient assets have been pledged by the commercial department to cover fiduciary funds on deposit with the trustee bank, which of the following should NOT be added to the net demand deposit account balance at the individual account level?

a. overdrafts
b. outstanding checks
c. interest bearing accounts of the trustee bank awaiting investment or distribution

Answer 1

Interest bearing accounts should not be added to the net demand deposit account balance when determining if sufficient assets cover fiduciary funds, as these accounts are typically set aside for earning interest and are not immediately required to cover liabilities.

Step-by-step explanation:

To ascertain if sufficient assets have been pledged by the commercial department to cover fiduciary funds on deposit with the trustee bank, the following should NOT be added to the net demand deposit account balance at the individual account level: interest bearing accounts of the trustee bank awaiting investment or distribution.

This is because the interest bearing accounts typically represent funds that are earning interest and are not immediately needed to cover the net demand deposits or liabilities. Banks consider deposits as liabilities, since they owe these funds to depositors who can withdraw at any time.

Furthermore, banks are required to keep a certain percentage of these deposits as reserves, either in the bank's vaults or at the Federal Reserve Bank, which is known as the reserve requirement. This requirement is in place to ensure banks have sufficient liquidity to meet withdrawal demands.