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COMMERCIAL BANK OPERATIONS CHAPTER 17. Dr. David P. EchevarriaALL RIGHTS RESERVED2 BANK SOURCES OF FUNDS A.Transaction Deposits; checking accounts 1.Commercial.

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Presentation on theme: "COMMERCIAL BANK OPERATIONS CHAPTER 17. Dr. David P. EchevarriaALL RIGHTS RESERVED2 BANK SOURCES OF FUNDS A.Transaction Deposits; checking accounts 1.Commercial."— Presentation transcript:

1 COMMERCIAL BANK OPERATIONS CHAPTER 17

2 Dr. David P. EchevarriaALL RIGHTS RESERVED2 BANK SOURCES OF FUNDS A.Transaction Deposits; checking accounts 1.Commercial accounts non-interest bearing 2.Interest bearing checking accounts B.Savings Deposits; pass-book savings C.Time Deposits; short-term CDs 1.Managing Term risk 2.Penalties for early withdrawal

3 Dr. David P. EchevarriaALL RIGHTS RESERVED3 BANK SOURCES OF FUNDS D.Money Market Deposit Accounts; providing higher yields via T-bills, S-T securities 1.Provide better returns to customers with large balances 2.Provide roll-up services for commercial clients E.Eurodollar Borrowings; more by businesses F.Bonds/Stock Issued by the Bank; raising long-term capital

4 Dr. David P. EchevarriaALL RIGHTS RESERVED4 BANK USES OF FUNDS A.Cash; transaction needs B.Bank Loans; to create assets (loans to bank customers) 1.Working Capital Loans; important source of S-T liquidity for firms 2.Bridge loans for LBO, interim financing, etc 3.Lines of Credit 4.Importance of Prime rate

5 Dr. David P. EchevarriaALL RIGHTS RESERVED5 BANK USES OF FUNDS C.Investment Securities; purchase of government and corporate bonds D.Lending in Federal Funds Market; lending excess reserves E.Eurodollar Loans; correspondent bank relationships or foreign branches

6 Dr. David P. EchevarriaALL RIGHTS RESERVED6 MEETING RESERVE REQUIREMENTS A.Federal Funds: borrowing from other banks (over-night) B.Borrowing from the Federal Reserve Banks; capital / reserve requirements 1.Cheapest source of lendable funds or to make up short-falls in reserves 2.Increasingly a bank of last resort

7 Dr. David P. EchevarriaALL RIGHTS RESERVED7 OFF BALANCE SHEET ACTIVITIES* A.Loan Commitments (for LBO) B.Standby Letters of Credit (especially for Import/Export financing) C.Swap Contracts (Interest rate and Currency) * Generate fee income

8 Dr. David P. EchevarriaALL RIGHTS RESERVED8 HOMEWORK QUESTIONS A.What are the principal sources of funds for banks? B.What are the principal uses of funds for banks? C.In what ways can a bank use the Federal Funds market? D.How does a bank create profit via the fractional reserve system? E.How does the Electronic Funds Transfer (EFT) benefit the banking system?


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