Commercial Banks
Essay Preview: Commercial Banks
Report this essay
Chapter 17
2. Four major sources of funds for a bank are transaction deposits, federal funds purchased, repurchased agreements, and bonds issued by the bank. A bank can either borrow from the Federal Reserve Banks or a repurchase agreement when they need temporary funds. Banks issue bonds because they have less need for long-term funds.
4. Money market deposit accounts differ from conventional time deposits in that they do not specify maturity. They are more liquid than retail CDs but offer lower interest rates. They differ from NOW accounts in that they provide limited check-writing abilities, require a larger minimum balance, and offer a higher yield.
Federal Funds – Are overnight borrowings between banks and other entities to maintain their bank reserves at the Federal Reserve.
Federal Funds Market – Market that facilitates the flow of funds from banks that have excess funds to banks that are in need of funds.
Federal Funds Rate – Interest rate charged on loans between depository institutions.
The federal funds rate moves in reaction to changes in demand or supply or both.
The federal funds market is typically most active on Wednesdays because that is the final day of each particular settlement period for which each bank must maintain a specified volume of reserves required by the Fed.
10. Banks invest funds in securities rather than loans because securities tend to be more liquid. Smaller banks tend to have a relatively large amount of household loans and government securities; larger banks have a higher level of business loans. The distribution of assets for an individual bank varies with the type of bank.
11. When there is an issuance of a new stock it increases a bank’s capital but on the other hand it dilutes the bank’s ownership. Manufacturing companies would have a lot higher percentage of their capital being assets. If the assets are low risk they are assigned low eights but if it has a high risk it is assigned with a high weight. The capital level is set as a percentage of the risk-weighted assets.