Chapter 13

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INTRODUCTION  This uncertainty increases the risk that a bank may not CHARACTERISTICS OF RETAIL-TYPE DEPOSIT

 Important lesson of the financial crisis is have adequate sources of funds available to meet  Retail deposit or small denomination
that financial market and institutions will payment requirements. (under $250,000) liabilities
collapse when liquidity disappears.  This risk, in turn forces mgt to structure its portfolio to fundamentally different from those of
 The collapse of Lehman Brothers in 15 access liquid funds easily, which lowers potential wholesale or large denomination
September 2008 is an evidence of profits. liabilities.
financial crisis effect.  The amount of cash that mgt chooses to hold is heavily  Characteristics:
 The US govt seized the control of AIG due influenced by the bank’s liquidity requirements.  Held by individual investors
to default to meet its collateral  The potential size and volatility of cash requirements in  Not actively traded in the secondary
requirements and payment obligations turn affect the liquidity position of the bank. market.
on credit swaps.  Transactions that reduce cash holdings normally force  Transaction accounts consists of:
 Other effect is some company applied to a bank to replenish cash assets by issuing new debt or  Demand Deposit Accounts (DDAs)
become Bank Holding Companies which selling assets.  Interest Bearing Checking Account
used to gain access to Federal Reserve.  Transactions that increase cash holdings provide new and Automatic Transfers from Saving
investible funds. (ATSs)
THE RELATIONSHIP BETWEEN LIQUIDITY  Money Market Deposit Accounts
REQUIREMENTS, CASH AND FUNDING (MMDAs)
SOURCES  Saving Accounts and Small Time
CHAPTER 13
 Liquidity need arise when customers Deposits
withdraw funds from the bank. FUNDING  Large time Deposits
 The effect of withdrawals is a net deposit
outflow when balances the bank hold CHARACTERISTICS OF LARGE WHOLESALE
with federal reserve banks or LIABILITIES
BANK FUNDING SOURCES
correspondent banks decline.  These instruments new issued primarily
 One of the most difficult problem bank managers is
 Most withdrawals are predictable by the largest banks and purchased by
face is how to determine the optimal mix of funding. business and govt units.
because they are either contractually
 Funding sources:  Characteristics:
based or follow well defined patterns.
 Retail funding refer to funds that receives from  Risky instruments
 For example, transactions accounts
customers and non-institutional depositors. RF  Large denomination normally will
normally exhibit weekly or monthly
normally consist of transactions accounts, carry denominations in multiples of
patterns that follow payroll and
MMDAs, Saving account and small time deposits. $1,000,000.
billing activities.
 Borrowed or wholesale funding refer to federal  Actively traded in the secondary
 However, they are some outflows are
funds purchased, repurchase agreements, FHLB market.
totally unexpected.
borrowings and CDs.
 For example, mgt does not know  CDs consists of
 Equity-related funding consists largely of
when the customer will reinvest  Fixed rate CDs
subordinated debt, common and preferred stock
maturing CDs or loan customers will  Variable-rate CDs
and retained earnings.
borrow against the credit lines.  CD Specials
 Callable CDs BORROWING IMMEDIATE AVAILABLE FUNDS FEDERAL HOME LOAN BANK (FHLB)
 Zero-coupon CDs  Immediate available funds are balances that  The FHLB system is a government-
 Rate Boards are accepted as a means of payment within sponsored enterprise that was originally
one business day on demand. created to assist individuals in home-
FOREIGN OFFICE DEPOSITS  Most of the large transactions may be solve buying.
 Most large US commercial banks trough:  Today FHLBs are among the largest US
compete aggressively in international  Federal Funds Purchased financial institutions.
markets.  Security Repurchase Agreements
 Currently, the bank customers go  Structured Repurchase Agreements ELECTRONIC MONEY
overseas for cheaper financing and feel  Electronic commerce considers as one of
unfettered by national boundaries. the impact of technology in banking.
 Saving transactions in short term  One can pay goods electronically, apply
CHAPTER 13
international markets often take place in and receive loan electronically, even
the Eurocurrency market. FUNDING invest electronically.
 Eurocurrency refers to financial claim  In future, smart cards, e-cash, and e-
denominated in a currency other than checks will be dominant in the market.
that of the country where the issuing
institutions is located. CHECK
BORROWING FROM THE FEDERAL RESERVE
 The most important Eurocurrency is  The purpose of the check is to
 The borrowing facility is called the discount
Eurodollar which refers to a dollar  Facilitate check truncation by
denominated financial claim at a bank window.
reducing some legal impediments
outside the United States.  All federal reserve banks charge a fixed rate,  Foster innovation in the payments
 The Eurodollar market comprises both known as discount rate which is formally set and check collection system
loans and deposits each with different by the district federal reserve banks and  Improve the overall efficiency of the
characteristics and participants. approved by the board of governance. nation’s payments system.
 Eurodollar Deposits are dollar-  Lending programmes include:  Check truncation is the conversion of
denominated deposits in banks outside  Primary credit paper check into electronic debit or
the US.  Secondary credit image of the check by third party in the
 Seasonal credit
 They are virtually identical to time payment system.
 Emergency credit
deposits issued directly by domestic
banks except for the country of issue.  Other borrowings:
 Term auction facility FUNDING SOURCES AND BANKING RISKS
 Term securities lending facility  Funding sources
 Commercial paper funding facility  Liquidity risk
 Interest rate risk
 Credit risk

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