CHAPTER TWELVE Managing Nondeposit Liabilities And Other Sources Of Borrowed Funds The purpose of this chapter is to learn about the principal nondeposit sources of funds that financial institutions can borrow to help finance their activities and to see how managers choose among the the various nondeposit funds sources currently available to them.
Customer Relationship Doctrine The First Priority of the Bank is to Make Loans to All Qualified Customers and If Funds are Not Available the Bank Should Seek Out the Lowest Cost Source of Funding to Meet Customers’ Needs.
Liability Management The Bank Buys Funds in Order to Satisfy Loan Requests and Reserve Requirements It is an Interest-Sensitive Approach to Raising Bank Funds It is Flexible – The Bank Can Decide Exactly How Much They Need and For How Long The Control Mechanism to Regulate Incoming Funds is the Price of Funds
Nondeposit Sources of Funds Federal Funds Market Federal Reserve Bank Negotiable CDs Commercial Paper Repurchase Agreements Long Term Sources
Federal Funds Market Deposits Held by U.S. Banks at Federal Reserve Banks, Deposits with Correspondent Banks and Demand Deposit Balances of Security Dealers and Governments Can Be Used For Loans to Institutions
Types of Fed Funds Loan Agreements Overnight Loans Term Loans Continuing Contracts
Repurchase Agreements Involves the Temporary Sale of High-Quality Assets (usually Government Securities) Accompanied by an Agreement to Buy Back Those Assets On a Specific Future Date At a Predetermined Price or Yield
Borrowing From the Federal Reserve Bank A Bank With Immediate Reserve Needs Can Borrow From the Federal Reserve. There are Three Types of Loans for Different Needs, Each With Its Own Interest Rate. There are Restrictions on the Frequency of Borrowing at the Federal Reserve.
The Three Types of Federal Reserve Loans Adjustment Credit – This Loan is Only for a Few Days and is to Provide Immediate Aid in Meeting Reserve Requirements Seasonal Credit – This Loan Has a Longer Maturity Than the Adjustment Credit Loan and is For Banks With Seasonal Swings in Deposits and Loans Extended Credit – This Loan is for Banks Experiencing Longer-Term Funding Problems
Negotiable CD An Interest-Bearing Receipt Evidencing the Deposit of Funds in the Bank for a Specified Period of Time for a Specified Interest Rate. It is Considered a Hybrid Account Since it is Legally a Deposit
The Four Types of Negotiable CDs Domestic CDs – Issued By Domestic Banks in the U.S. Euro CDs – Dollar Denominated CDs Issued Outside the U.S. Yankee CDs – Issued By Foreign Banks in the U.S. Thrift CDs – Issued By Large Savings and Loans and Other Nonbanks in the U.S.
Eurocurrency Deposit Market Eurodollars are Dollar-Denominated Deposits Placed in Banks Outside the U.S. Eurocurrency Deposits Originally Were Developed in Western Europe to Provide Liquid Funds to Swap Among Institutions or Lend to Customers
Commercial Paper Short-Term Notes With Maturities from 3 or 4 Days to 9 Months Issued By Well-Known Companies. Banks Cannot Issue These Directly But Affiliated Companies Can Issue Them.
Long-Term Nondeposit Sources of Funds Mortgages to Fund the Construction of New Buildings and Capital Notes and Debentures are Examples of Long Term Sources of Funds
The Funds Gap Current and Projected Demand and Investments the Bank Desires to Make Current and Expected Deposit Inflows
Factors to Consider When Choosing Nondeposit Sources of Funds The Relative Costs of Raising Funds From Each Source The Risk of Each Funding Source The Length of Time for Which Funds are Needed The Size of the Bank Regulations Limiting the Use of Various Funding Sources