17
McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Chapter Thirteen Managing Nondeposit Liabilities and Other Sources of Borrowed Funds
McGraw-Hill/Irwin©2008 The McGraw-Hill
Companies, All Rights Reserved
Chapter ThirteenChapter Thirteen
Managing Nondeposit Liabilities and Other Sources of
Borrowed Funds
Managing Nondeposit Liabilities and Other Sources of
Borrowed Funds
13-2McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Customer Relationship Doctrine
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.
13-3McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Liability ManagementLiability 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
13-4McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Nondeposit Sources of Funds
Nondeposit Sources of Funds
• Federal Funds Market• Repurchase Agreements• Federal Reserve Bank• Advances from the Federal Home Loan
Bank• Negotiable CDs• Eurocurrency Deposit Market• Commercial Paper• Long Term Sources
13-5McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Federal Funds MarketFederal 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
13-6McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Types of Fed Funds Loan Agreements
Types of Fed Funds Loan Agreements
• Overnight Loans• Term Loans• Continuing Contracts
13-7McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Repurchase AgreementsRepurchase 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
13-8McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Borrowing From the Federal Reserve Bank
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.
13-9McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
The Three Types of Federal Reserve Loans
The Three Types of Federal Reserve Loans
• Primary Credit – This Loan is Available for Short Terms and to Institutions in Sound Financial Condition. Rate is Slightly Higher than the Federal Funds Rate.
• Secondary Credit – These Loans are Available at a Higher Interest Rate to Institutions not Qualifying for Primary Credit. Monitored by the Federal Reserve to Control Excess Risk
• Seasonal Credit - These loans Cover Longer Periods Than Primary Credit for Small and Medium Institutions Experiencing Seasonal Swings in Deposits and Loans
13-10McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Advances from the Federal Home Loan Bank
Advances from the Federal Home Loan Bank
• Allows Institutions to Use Home Mortgages as Collateral for Advances
• A Way to Improve the Liquidity of Home Mortgages and Encourage more Lenders to Provide Credit
• Number of Loans has Increased Dramatically in Recent Years
• Maturities Range from Overnight to More than 20 Years
• FHLB Ca Borrow Cheaply and Pass Savings to Institutions
13-11McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Negotiable CDNegotiable 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
13-12McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
The Four Types of Negotiable CDs
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.
13-13McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Eurocurrency Deposit Market
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
• Labeled ‘Liabilities to Foreign Branches’ When a Foreign Branch Lends Eurodeposits to its Home Office
13-14McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Commercial PaperCommercial Paper
• Short-Term Notes With Maturities from 3 or 4 Days to 9 Months Issued By Well-Known Companies.
• Two Types– Industrial Paper- -Purchase Inventories– Finance Paper – Issued by Finance
Companies and Financial Holding Companies
• Banks Cannot Issue These Directly But Affiliated Companies Can Issue Them.
13-15McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Long-Term Nondeposit Sources of Funds
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
13-16McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
The Funds GapThe Funds Gap
• Gap is Based on:– Current and Projected Demand and
Investments the Bank Desires to Make– Current and Expected Deposit Inflows
and Other Available Funds
• Size of This Gap Determines Need for Nondeposit Funds
13-17McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Nondeposit Funding Sources: Factors to Consider
Nondeposit Funding Sources: Factors to Consider
• 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 Institution• Regulations Limiting the Use of Various
Funding Sources
