Citibank Risk 4 – Demand Deposit Accounts No More

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April Fools?

Check out this mess over at Seeking Alpha (my emphasis):

Seen on a recent Citibank (C) statement: “Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change.”


I called Citi about it and they said the warning applies only to customers in Texas and that the notification had been mistakenly included on statements nationwide. Whatever the explanation, it doesn’t exactly inspire confidence in Citi. I’ve got nothing against Citi as a general matter — I have friends who work there, and know some account holders who are generally satisfied customers. But it’s hard to believe a bank would be sending out a notice like that on its statements.

A Citibank rep responded in the comments:

Received by email:
I saw your post on Citibank and wanted to get you some additional information. At issue is Reg D, which requires that in order for a NOW account to be eligible to earn interest or receive promotions, a bank must reserve the right to require seven days advance notice before permitting a withdrawal.

When Citibank moved to unlimited FDIC coverage in 2009, we had to reclassify many checking accounts to allow for immediate withdrawals in order to ensure all customers qualified for the additional coverage. When we moved back to standard FDIC coverage with most major banks in 2010, Citibank decided to reclassify those accounts back to make them eligible again for promotional incentives. To do so, Federal Reserve Reg D requires these accounts, called NOW accounts, to reserve the right to require a 7-day notice of withdrawal. We recently communicated this technical requirement to our customers. However, we have never exercised this right and have no plans to do so in the future.

Robert Julavits
Citi Public Affairs

Regular checking accounts are DDA accounts, normally. That means “Demand Deposit Account“. Simply explained, a DDA means that the bank acts as a custodian of your money. Your money in a DDA is NOT there to be loaned out to others. The money is supposed to be there at the exact time you demand it.

There is a type of “checking account” that is not DDA – it’s called a NOW account (Negotiable Order of Withdrawal) – which normally may require some amount of notice to the bank prior to withdrawal. These accounts generally offer some benefit, such as the ability for your cash to earn interest, in exchange for the stricter requirements.

Citi Lied

When I first read about this new Citibank risk, I took them at their word, that it was a simple mistake. Then I found this:

You may need to click the image to read the text. Look at the highlighted text. Especially read the last highlighted item.

“We reserve the right to require seven (7) days advance notice before permitting a withdrawal from all checking, savings and money market accounts.”

In essence, they’re saying that there are no DDA accounts available at Citi, period. At any point in time, they can simply deny your check or refuse to hand over your cash. This makes the response by Robert Julavits look like so much steaming crap in a field of green. Denninger explains it well (emphasis in original):

Now most banks will not allow you to walk in and demand $50,000 in cash at any instant, mostly because they don’t have it, or if they do have it allowing that would severely deplete their cash amount on hand and they would not be able to transact routine amounts for other people. After all, it takes time (even if only a few hours) to order up an armored truck full of $100s and $20s.

But “withdraw” is not limited to cash.

You can get a counter (bank) check for the entire balance, you can write a check on your account (and give it to someone or deposit it somewhere else) and you can wire or ACH money in or out of the account. All are “withdrawals.”

“NOW” (negotiable order of withdrawal) accounts are a different sort of animal. Those pay interest, and on those accounts the bank reserves the right (and always has) to require notice. Same with saving-linked sweeps (which, by the way, is what Alan Greenspan wildly expanded the authorization for early in his tenure as Fed Chairman, essentially destroying bank reserve requirements as this was instantaneously gamed to reduce actual held reserves almost to zero.)

What this “quiet” little change means is that Citibank has changed the character of all of its checking accounts. They no longer offer a “DDA” account, whether they did before or not.

The importance of this cannot be overstated. Without a “DDA” account the bank could at its sole discretion dishonor any check at any time, thereby hitting you with an overdraft fee as you didn’t give them the requisite seven days notice. It could also prevent you from removing your funds to a more appropriate (for you) institution for that seven days, entirely at their whim and sole discretion.

ALL time deposits (savings accounts included, which have always contained this requirement) effectively are a loan of funds from you to the bank. That is, you don’t “deposit” money there, you loan it to the bank which then charges other people to borrow it. This relationship isn’t taught in our Goebbels Government Education System (not even in college!) but it is nonetheless true.

However, essentially all banks have maintained one type of account – a Demand Deposit Account – which in fact operates differently. A DDA account is an appointment of the bank as a custodian of your funds, not as a borrower of your funds. Said account never pays interest (per Federal Reserve rules – and common sense) yet it allows immediate, unrestricted access to your funds because you are not lending them to the bank, you are appointing them as a custodian of them.

DDA accounts are essential for the ordinary flow of commerce. There must be an option available to consumers and businesses alike in which they can place custody of funds they may need, up to the entire balance of that account, at any point in time without prior notice. Without this ability you are literally at the mercy of the financial institution in question, which can cause you to incur hideous “bounced check” and other similar charges as well as potentially exposing you to criminal liability for “uttering” (writing bad checks.)

This is NOT a trivial change in terms. I would never do business with an institution for my business or personal checking accounts that did not offer a true demand account, and you should not either. This sort of change is outrageously destructive to your rights as the funds you have on deposit in a checking account are not intended to be loaned to the bank to do with as they wish, but rather to be held for your immediate (if necessary or desired) use.

Do you know what kind of checking account you have at your current bank or credit union? Here’s a quick somewhat reliable test: Ask yourself one question – does my checking account have interest applied to it? If you are accruing interest on the funds in your account, then you do not have a DDA account. DDA accounts, per federal law, cannot accrue interest.

Maybe you think that you need that interest? Wow, how much do you have in that checking account anyway? And if interest is your thing, what is your cash doing in a checking account anyway? Face it, for the few dollars per year you get in interest, you’re allowing someone else ultimate control over your cash. I’d be willing to bet that one bounced check charge would wipe all that interest away.

And with a policy like the Citibank policy, that could happen even if you have funds in the account. Check yourself, check your bank. This is, after all, your money.

For more on CitiRisk at Wordout:
The Citibank Risk
More Citibank Risk
Citibank Risk 3 – Another WTF Bailout