Chapter Thirteen
Managing Nondeposit Liabilities and
Other Sources of Borrowed Funds
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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.
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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
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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
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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
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Types of Fed Funds Loan
Agreements
• Overnight Loans
• Term Loans
• Continuing Contracts
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Repurchase Agreements
Involves the Temporary Sale of HighQuality Assets (usually Government
Securities) Accompanied by an Agreement
to Buy Back Those Assets On a Specific
Future Date At a Predetermined Price or
Yield
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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.
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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
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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
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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
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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.
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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
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Commercial Paper
• Short-Term Notes With Maturities from 3
or 4 Days to 9 Months Issued By WellKnown 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.
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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
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The 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
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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
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