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Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Managing Nondeposit
Liabilities and Other
Sources of Bank Funds
Chapter
15
The purpose of this chapter is to learn about the principal
nondeposit sources of funds that bankers can borrow to help finance
their activities and to see how bank managers choose among the
the various nondeposit funds sources currently available to them.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Liability 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
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Nondeposit Sources of Bank Funds
 Federal
Funds Market
 Federal Reserve Bank
 Negotiable CDs
 Commercial Paper
 Repurchase Agreements
 Long Term Sources
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Federal 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
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Types of Fed Funds Loan Agreements
 Overnight
Loans
 Term Loans
 Continuing Contracts
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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.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
The Three Types of Federal Reserve Loans
Credit – This Loan is Only for a Few Days
and is to Provide Immediate Aid in Meeting Reserve
Requirements
 Seasonal Credit – This Loan Has a Longer Maturity
Than the Adjustment Credit Loan and is For Banks
With Seasonal Swings in Deposits and Loans
 Extended Credit – This Loan is for Banks Experiencing
Longer-Term Funding Problems
 Adjustment
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Negotiable 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
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
The Four Types of Negotiable CDs
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.
 Domestic
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Commercial Paper
Short-Term Notes With Maturities from 3
or 4 Days to 9 Months Issued By WellKnown Companies. Banks Cannot Issue
These Directly But Affiliated Companies
Can Issue Them.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Repurchase Agreement
The Temporary Sale of High-Quality,
Easily-Liquidated Assets Accompanied By
an Agreement to Buy Back Those Assets
On a Specific Future Date at a
Predetermined Price
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
The Funds Gap
= Current and Projected Demand and
Investments the Bank Desires to Make
- Current and Expected Deposit Inflows
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Factors to Consider When Choosing
Nondeposit Sources of Funds
 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 Bank
 Regulations Limiting the Use of Various Funding
Sources
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.