CHAPTER 2: COMMERCIAL BANKS

2.2 Sources of funds

 Commercial banks are highly leveraged organisations – a large percentage of their funds is in the
form of debt liabilities that must be repaid; the remainder is different types of equity
 Current account deposits are liquid funds held in a cheque account; a cheque is a written
instruction to the bank to pay the specific sum to the payee shown on the cheque. Businesses use
cheque accounts as their operating accounts
 Call or demand deposits are liquid funds held in a savings-type account. They represent a stable
source of funds for banks. They typically pay a low rate of interest, and account fees may be
charged
 Term deposits are savings lodged for a specific period of time that pay a fixed rate of interest. The
higher interest rate compensates for loss of liquidity
 Negotiable certificates of deposit are short-term discount securities issued by a bank and sold into
the money market. They are issued today with a face value payable at maturity, and no interest is
paid.
 Bill acceptance liabilities are a commitment by a bank, on behalf of the bill issuer, to pay the face
value of a bank-accepted bill to the bill holder at maturity
 Debt liabilities are longer-term debt instruments issued directly into the local capital markets. They
include interest-paying bonds such a debentures, unsecured notes and transferable certificates of
deposit
 Commercial banks issue foreign-currency-denominated debt securities into the international
capital markets to raise foreign currency liabilities
 Loan capital includes hybrid securities issued by a bank such as subordinated notes. The main
type of equity issued is ordinary shares. Shareholder funds are an important source of long-term
funding