Chapter 17- Commercial bank operation

Under borrowed funds there are 4 categories: They are- 1. Federal Funds purchase 2. Borrowing
from the federal reserve banks 3. REPO 4. Euro dollar borrowing

First of all, Federal funds purchase - borrowing between banks, when bank experiencing
shortage of fund borrows from another financial institutions. Such as another bank with excess of
fund.

- So this FF purchase tries to correct a banks temporary need more funds are being deposited.

- So market were this borrowing and lending occurs between two banks this market is called FF
Market.

- FF market operate to correct the fund imbalance between banks. - Usually this loan typically
has the maturity of 1 to 7 days.

- Borrowing is very short term. Short term liquidity needs of a bank this borrowing happens. -
Rate between this two-bank called Federal funds rate.

- The determination of the interest rate of the borrowing and the lending is done by the market. -
Bank must compensate with additional reserves.

- The bank which is borrowing for them this fund is a liability

- The bank which is lending the fund for them is an asset.

- In the market if there are many bank

- The rate is determined by the market Borrowing from the federal reserve banks (Central Bank)

- Banks first source of fund is the depositors accounts - 2nd one is; federal fund purchase - 3rd
one is borrowing from the federal reserve’s bank

- Borrowing from the central bank is the last resource

- If a bank after borrowing from depositors and after borrowing from federal market or other
bank and still faces shortage of fund then they can borrow from the Central Bank.
- Central bank is called the lender of the last resort - The interest rate charged on loans from the
central bank is the Primary credit lending rate - Primary credit lending rate is always higher in
comparison to the federal rate, because central bank discourages borrowing from central bank.

- They encourage banks to meet their short-term fund crisis by borrowing from the federal
market or by borrowing from other banks rather than the central bank. They encourage banks to
come the central bank if there are no other ways. Hats why borrowing from the central bank is
known as the lender of the last resort.

- Loans from the central bank are commonly from 1 day to up few weeks, so its very short
term.so the discount window or the lending window is mainly use to resolve a temporary
shortage of fund.

- If a bank continuously borrows from central bank then this gives a red signal to the central
bank.

- Because this is not a temporary problem this is a permanent problem

- The central bank disapproves continues borrowing a bank

- Then they ask bank look knto the matter to find out why they are facing continuous temporary
shortage of fund

- Central bank lender of the last resort

- After deposit account after borrowing from the federal market

- Then it’s come to the central bank

- The primary credit lending rate is higher than the federal rate. Repo (Re-purchase agreement) -
corporations from selling securities to corporations with excess of funds; they sell the security
corporations with a guarantee that they will buy back the securities at a specific date and price
and return back the fund.

- It represents the sale of securities by banks to a a corporation with an agreement to repurchase

the securities at a specified date - Bank use repo as a source of fund when they need fund only
for a few days; when they are facing shortage. - REPO occur tele communications network
connecting large bank corporation’s government securities dealers and federal fund brokers. -
Market determines the inevitable rate

Euro dollar borrowing - US bank is need of short. Term fund they are allowed to borrow dollars
from those banks outside the United states. That accept dollar denominated deposit or Euro
dollars, - Euro dollars are dollars denominated deposits in bank outside the US - They can take in
deposits in other foreign currencies like euro. - Euro banks are foreign banks or foreign branches
of US that accept large short-term deposits and make short term loans in dollars - This is banking
transaction occurring across border - In Bangladesh, it has a offshore banking unit (OBU) that
conduct banking activities in foreign currency. - Its strictly monitored by Bangladesh Bank - So
this part of banking is very small in Bangladesh The last source of fund is the Long term sources
of Fund Two in categories-

* Bonds issued by Bank -bank have fix assets too; such as buildings, land and equipment’s, This
asset have life expectancy of 20 years or more. - In order to finance this fix assets bank, need
long term sources of fund. - They issue bonds to get this long term sources of fund - Using this
fund they finance their fixed assets - Common purchaser of this fix assets of bond are households
and various Financial institutions - Like insurance company, pension funds - Bank finance less
with bonds than other corporations - They own very few fixed assets Last long term source of
fund is the Bank Capital - bank capital are the funds attend by the bank through issuing stock or
through retain earnings There are two categories of bank capital

* primary capital Primary capital results from issuing common or preferred stock or retained
earnings

* Secondary capital Secondary capital results from issuing subordinated notes and bonds

- Bank issues stocks at the beginning when they starts - So bank generally avoid issuing new
stock later on because it dilutes the ownership of the bank - They don’t want too many owners -
Their earnings per share get reduced if they issue too many stocks - Bank capital is attain
through retain earnings and issuing stocks Transactions and deposits are on 30% Distribution of
bank sources is influence by bank size - smaller bank rely more heavily on saving deposits than
do larger banks - Now this is based on Americans market