Commercial Bank Operations
Bank Participation in Financial Conglomerates
n Benefits of diversified services to individuals and firms
l Individuals can obtain all their financial services at a single financial conglomerate
u Deposits
u Loans
u Investing (brokerage)
u Insurance
l Businesses can obtain loans, issue stocks and bonds, and have their pension fund managed by the same institution
Bank Participation in Financial Conglomerates
n Benefits of diversified services to the financial institution
l Reduce reliance on demand for single service
l Diversification may result in less risk
l Generate new business
Bank Sources of Funds
n Demand deposit (checking) account
l Requires small minimum balance but pays no interest
n Savings Deposits
l Does not permit check writing
l Restrictions regarding amount and timing of withdrawal
l Often have no minimum balance
l Automatic Transfer Service (ATS) to checking account
Bank Sources of Funds
n Time Deposits
l Certificate of deposit (CD)
u No secondary market
l Negotiable CD
u Short-term, minimum $100,000
u Can trade among investors via dealer
n Money Market Deposit Accounts (MMDAs)
l More liquid than CDs : no specified maturity
l Limited check writing
Bank Sources of Funds
n Federal Funds Purchased
l Short-term loans between banks
l Allows banks to meet reserve requirement or funding needs
l Interest rate charged is the federal funds rate
n Borrowing from the Federal Reserve Banks (lender of last resort)
l Rate slightly higher than federal funds rate
u Intended for meeting temporary short-term needs
l Must get Fed approval
n Repurchase agreements
Bank Sources of Funds
n Eurodollar borrowings
l Banks outside the United States make dollar-denominated loans
n Bonds issued by the bank
l Like other businesses, banks issue bonds to finance long-term fixed assets
l Usually subordinated to deposits
l Secondary capital
Bank Sources of Funds
n Bank capital
l Obtained from issuing stock or retaining earnings
l No obligation to pay out funds in the future
l Primary capital
l Must be sufficient to absorb operating losses
Uses of Funds by Banks
n Cash balances at institutions
l Reserve requirements imposed by Fed
u Tool for controlling the money supply
l Also hold cash and due from balances to maintain liquidity and accommodate withdrawal requests by depositors
Uses of Funds by Banks
n Bank Loans
l Types of business loans
u Working capital loans
u Term loans
n Financing purchase of fixed assets
u Informal line of credit
u Revolving credit loan
Uses of Funds by Banks
n Bank Loans
l Loan participations/syndications
u Sometimes large firms seek to borrow more money than an individual bank can provide
u Lead bank: initiates and services the loan for fees
l Collateral requirements on business loans
u Increasingly accepting intangible assets
u Important to service-oriented firms
Uses of Funds by Banks
n Bank Loans
l Types of consumer loans
u Installment loans
u Credit cards
l Real estate loans (Mortgages)
Uses of Funds by Banks
n Investment securities (bank income and liquidity)
l Treasury securities
l Government agency securities
u Freddie Mac and Fannie Mae
l Corporate and municipal securities
u Investment grade only
n Federal funds sold
l Lending funds in the federal funds market
Uses of Funds by Banks
n Repurchase agreements (reverse repo)
n Eurodollar loans and deposits
n Fixed assets
l Office buildings and land
Off-Balance Sheet Activities
n Loan commitments (“Limits”)
l Obligation of bank to provide a specified loan amount to a particular business upon request
l Note issuance facility (NIF)
l Banks earn fee income for risk assumed
n Asset Securitization
n Standby letters of credit (SLC)
l Backs a customer’s obligation to a third party
l Banks earn fee income