COMMERCIAL BANK OPERATIONS

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Presentation transcript:

COMMERCIAL BANK OPERATIONS CHAPTER 17

BANK SOURCES OF FUNDS Transaction Deposits; checking accounts Commercial accounts non-interest bearing Interest bearing checking accounts Savings Deposits; pass-book savings Time Deposits; short-term CDs Managing Term risk Penalties for early withdrawal Dr. David P. Echevarria ALL RIGHTS RESERVED

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

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

BANK USES OF FUNDS Investment Securities; purchase of government and corporate bonds Lending in Federal Funds Market; lending excess reserves Eurodollar Loans; correspondent bank relationships or foreign branches Dr. David P. Echevarria ALL RIGHTS RESERVED

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

OFF BALANCE SHEET ACTIVITIES* Loan Commitments (for LBO) Standby Letters of Credit (especially for Import/Export financing) Swap Contracts (Interest rate and Currency) * Generate fee income Dr. David P. Echevarria ALL RIGHTS RESERVED

HOMEWORK QUESTIONS What are the principal sources of funds for banks? What are the principal uses of funds for banks? In what ways can a bank use the Federal Funds market? How does a bank create profit via the fractional reserve system? How does the Electronic Funds Transfer (EFT) benefit the banking system? Dr. David P. Echevarria ALL RIGHTS RESERVED

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