One thing I have suggested to bankers in a low interest rate environment is to review their early withdrawal penalty on time deposits. Most institutions calculate the early withdrawal penalty as a number of days of interest.
The purpose of an early withdrawal penalty is to deter the customer from making an early withdrawal, and if such occurs, to compensate the institution for losing the deposit. There are no rules on how an early withdrawal penalty should be calculated.
Let's say you have a customer with a $1,000 time deposit bearing interest at 1% and the early withdrawal penalty is three months interest. If the customer makes an early withdrawal, the penalty is $2.50. Wow, hardly a detriment or compensation! How about charging a percentage of the amount withdrawn? In this case, let’s say 5%. Now, the penalty would be a more reasonable $50. Also, three months interest sounds like a lot where 5% doesn't sound too bad.
Think about it and review with management to see if you need to update your practices. If you do, don’t forget to update your disclosures!
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