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© 2003 South-Western/Thomson Learning

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Æhapter Objectives
Ô ëescribe the most common sources of funds
for commercial banks
Ô ëescribe the most common uses of funds for
commercial banks
Ô ëescribe typical off-balance sheet activities
for commercial banks

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•ank Participation in Financial
Æonglomerates
Ô umpact of the Financial Services
Modernization Act (|



•anks and other financial service firms were
given more freedom to merge and offer a range of
financial services
Ô unsurance
Ô Securities services
Ô •anks now a subsidiary of financial
conglomerates
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 •ank Participation in Financial
Æonglomerates
Ô •enefits of diversified services to individuals and
firms
undividuals can obtain all their financial services at a
single financial conglomerate
Ô ëeposits
Ô Loans
Ô unvesting (brokerage
Ô unsurance
•usinesses can obtain loans, issue stocks and bonds,
and have their pension fund managed by the same
D
institution
•ank Participation in Financial
Æonglomerates
Ô •enefits of diversified services to the
financial institution
Reduce reliance on demand for single service
Economies of scale and scope
ëiversification (service and geographical may
result in less risk
Generate new business

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•ank Sources of Funds
Ô Transaction deposits
ëemand deposit account (checking
Ô Savings ëeposits
Passbook savings

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•ank Sources of Funds
Ô Time ëeposits
Æertificate of deposit (Æë
Ô o secondary market
egotiable Æë
Ô Short-term, minimum $|00,000
Ô Æan trade among investors via dealer
Ô Money Market ëeposit Accounts (MMëAs
More liquid than Æës : no specified maturity
Limited check writing
Æreated in |
2 p
•ank Sources of Funds
Ô Federal Funds Purchased
Short-term loans between banks
Allows banks to meet reserve requirement or
funding needs
unterest rate charged is the federal funds rate
Ô •orrowing from the Federal Reserve •anks
•orrowing at the discount window
ëiscount rate
untended for meeting temporary short-term reserve
requirement needs
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Must get Fed approval

•ank Sources of Funds
Ô Repurchase agreements
Sale of securities by one party to another with an
agreement to repurchase the securities at a
specified date and price
•anks may sell T-bills to a corporation with
temporary excess cash (bank demand deposit
and then buy them back later
Source of funds for a few days
Æollateralized by the treasury bills

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•ank Sources of Funds
Ô Eurodollar borrowings
•anks outside the United States make dollar-
denominated loans
Eurodollar market is very large
Ô •onds issued by the bank
Like other businesses, banks issue bonds to
finance long-term fixed assets
Usually subordinated to deposits
Part of secondary regulatory capital |
•ank Sources of Funds
Ô •ank capital
Obtained from issuing stock or retaining earnings
o obligation to pay out funds in the future
Must be sufficient to absorb operating losses

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Uses of Funds by •anks
Ô Loans make up about 64 percent of bank assets,
while all securities make up about 22 percent of
assets. Æash represents 6 percent of bank assets.
Ô Æash and ³due from´ balances at institutions
Æurrency/coin provided via banks
Reserve requirements imposed by Fed
Ô Tool for controlling the money supply
Ô ëue from Fed and vault cash count as reserves
Also hold cash and due from balances to maintain
liquidity and accommodate withdrawal requests by
depositors |d
Uses of Funds by •anks
Ô •ank Loans
Types of business loans
Ô Working capital loans
Ô Term loans
Purchasing fixed assets
Protective covenants
Ô unformal line of credit
Ô Revolving credit loan

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Uses of Funds by •anks
Ô •ank Loans
Loan participations
Ô Sometimes large firms seek to borrow more money than
an individual bank can provide
Ô Lead bank
Loans supporting leveraged buyouts
Ô •anks charge a high loan rate
Ô Monitored by bank regulators

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Uses of Funds by •anks
Ô •ank Loans
Æollateral requirements on business loans
Ô uncreasingly g
g
assets
Ô umportant to service-oriented firms
Ô uncreased lending risk with service businesses--telecomm
Types of consumer loans
Ô unstallment loans
Ô Æredit cards
Real estate loans

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Uses of Funds by •anks
Ô unvestment securities (bank income and
liquidity
Treasury securities
Government agency securities
Ô Freddie Mac
Ô Fannie Mae
Æorporate and municipal securities
Ô unvestment grade only
Ô Federal funds sold
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Lending funds in the federal funds market
Uses of Funds by •anks
Ô Repurchase agreements
Ô Eurodollar loans
•ranches of U.S. banks located outside of the
U.S.
Foreign-owned banks
Ô Fixed assets
Office buildings
Land
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Off-•alance Sheet Activities
Ô Loan commitments
Obligation of bank to provide a specified loan
amount to a particular business upon request
ote issuance facility (uF
•anks earn fee income for risk assumed
Ô Standby letters of credit (SLÆ
•acks a customer¶s obligation to a third party
•anks earn fee income
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Off-•alance Sheet Activities
Ô Forward contracts
Agreement between a customer and bank to
exchange one currency for another on a particular
future date at a specified exchange rate
Allows customers to hedge their exchange-rate
risk

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Off-•alance Sheet Activities
Ô Swap contracts
Two parties agree to periodically exchange
interest payments on a specified notional amount
of principal
•anks serve as intermediaries or dealer and/or
guarantor for a fee