Medrana, Meilin Denise D.

➢ Federal Funds Purchased

AIS2B o Short-term loans between banks
o Allows banks to meet reserve requirement or
Commercial Bank Operations funding needs
o Interest rate charged is the federal funds rate
Bank Participation in Financial Conglomerates
➢ Impact of the Financial Services Modernization ➢ Borrowing from the Federal Reserve Banks
Act (1999) o Borrowing at the discount window
• Banks and other financial service firms were o Discount rate
given more freedom to merge and offer a o Intended for meeting temporary short-term
range of financial services reserve requirement needs
✓ Insurance o Must get Fed approval
✓ Securities services
➢ Banks now a subsidiary of financial ➢ Bank capital
conglomerates o Obtained from issuing stock or retaining
➢ Benefits of diversified services to individuals and earnings
firms o No obligation to pay out funds in the future
• Individuals can obtain all their financial o Must be sufficient to absorb operating losses
services at a single financial conglomerate
Deposits Uses of Funds by Banks
Loans
Investing (brokerage) ➢ Loans make up about 64 percent of bank assets,
Insurance while all securities make up about 22 percent of
• Businesses can obtain loans, issue stocks assets. Cash represents 6 percent of bank
and bonds, and have their pension fund assets.
managed by the same institution ➢ Cash and “due from” balances at institutions
• Currency/coin provided via banks
➢ Benefits of diversified services to the financial • Reserve requirements imposed by Fed
institution ✓ Tool for controlling the money supply
o Reduce reliance on demand for single ✓ Due from Fed and vault cash count as
service reserves
o Economies of scale and scope • Also hold cash and due from balances to
o Diversification (service and geographical) maintain liquidity and accommodate
may result in less risk withdrawal requests by depositors
o Generate new business
➢ Bank Loans
Bank Sources of Funds • Types of business loans
 Working capital loans
➢ Transaction deposits  Term loans
o Demand deposit account (checking) ✓ Purchasing fixed assets
➢ Savings Deposits ✓ Protective covenants
o Passbook savings  Informal line of credit
 Revolving credit loan
➢ Time Deposits
o Certificate of deposit (CD) • Loan participations
– No secondary market
 Sometimes large firms seek to borrow
o Negotiable CD
more money than an individual bank can
– Short-term, ex. minimum P100,000
provide
– Can trade among investors via dealer
 Lead bank
➢ Money Market Deposit Accounts (MMDAs) • Loans supporting leveraged buyouts
o More liquid than CDs: no specified maturity  Banks charge a high loan rate
o Limited check writing  Monitored by bank regulators
o Created in 1982
 • Collateral requirements on business loans
o Increasingly accepting intangible assets
o Important to service-oriented firms
o Increased lending risk with service
businesses--telecom
• Types of consumer loans
o Installment loans
o Credit cards
• Real estate loans
• Swap contracts
✓ Two parties agree to periodically exchange
interest payments on a specified notional
amount of principal
✓ Banks serve as intermediaries or dealer
and/or guarantor for a fee

• Investment securities (bank income and

liquidity)
o Treasury securities
o Government agency securities
o Corporate and municipal securities
 Investment grade only
• Federal funds sold
o Lending funds in the federal funds market

• Repurchase agreements
• Eurodollar loans
✓ Branches of U.S. banks located outside of
the U.S.
✓ Foreign-owned banks
• Fixed assets
✓ Office buildings
✓ Land

Off-Balance Sheet Activities

• Loan commitments
✓ Obligation of bank to provide a specified
loan amount to a particular business upon
request
✓ Note issuance facility (NIF)
✓ Banks earn fee income for risk assumed

• Standby letters of credit (SLC)

✓ Backs a customer’s obligation to a third
party
✓ Banks earn fee income

• Forward contracts
✓ Agreement between a customer and bank to
exchange one currency for another on a
particular future date at a specified
exchange rate
✓ Allows customers to hedge their exchange-
rate risk