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CHAPTER
17
Chapter Objectives
Describe the most common sources of funds for commercial banks Describe the most common uses of funds for commercial banks Describe typical off-balance sheet activities for commercial banks
Insurance Securities
services
Individuals can obtain all their financial services at a single financial conglomerate
Deposits
Loans Investing Insurance
(brokerage)
Businesses can obtain loans, issue stocks and bonds, and have their pension fund managed by the same institution
Copyright 2002 Thomson Publishing. All rights reserved.
Transaction deposits
Demand deposit account (checking) Negotiable order of withdrawal (NOW) account
1981 Requires
Savings Deposits
Passbook savings Regulation Q until 1986
Time Deposits
secondary market
Negotiable CD
Short-term,
Repurchase agreements
Sale of securities by one party to another with an agreement to repurchase the securities at a specified date and price Banks may sell T-bills to a corporation with temporary excess cash (bank demand deposit) and then buy them back later Source of funds for a few days Collateralized by the treasury bills Form of paying interest on large customer checking balances
Eurodollar borrowings
Banks outside the United States make dollardenominated loans Eurodollar market is very large
Bank capital
Obtained from issuing stock or retaining earnings No obligation to pay out funds in the future Primary vs. secondary Must be sufficient to absorb operating losses As of 1992: risk-based capital requirement
Tool
for controlling the money supply Due from Fed and vault cash count as reserves
Also hold cash and due from balances to maintain liquidity and accommodate withdrawal requests by depositors
Copyright 2002 Thomson Publishing. All rights reserved.
Bank Loans
Informal
Bank Loans
Loan participations
Sometimes
large firms seek to borrow more money than an individual bank can provide Lead bank
Bank Loans
accepting intangible assets Important to service-oriented firms Increased lending risk with service businesses--telecomm
Freddie
grade only
Fixed assets
Office buildings Land
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
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
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