1、174CHAPTER 13MANAGING NONDEPOSIT LIABILITIES AND OTHER SOURCES OF BORROWED FUNDSGoal of This Chapter: The purpose of this chapter is to learn about the principal nondeposit sources of funds that financial institutions can borrow to help finance their activities and to see how managers choose among t
2、he various nondeposit funds sources currently available to them. Key Topics in this Chapter Liability Management Customer relationship Doctrine Alternative Nondeposit Funds Sources Measuring the Funds Gap Choosing Among Different Funds Sources Determining the Overall Cost of FundsChapter OutlineI. I
3、ntroductionII. Liability Management and the Customer relationship DoctrineA. Customer Relationship DoctrineB. Purpose of Liability ManagementIll. Alternative Nondeposit Sources of FundsA. Federal Funds MarketB. Repurchase Agreements as a Source of Bank FundsC. Borrowing from the Federal Reserve Bank
4、 in the DistrictD. Advances from Federal Home Loan BanksE. Development and Sale of Large Negotiable CDsF. Eurocurrency Deposit MarketG. Commercial Paper MarketE. Long-Term Nondeposit Funds SourcesIV. Choosing Among Alternative Nondeposit SourcesA. Measuring a Financial Firms Total Need for Nondeposi
5、t Funds: The Funds GapB. Nondeposit Funding Sources: Factors to Consider1. Relative Costs2. The Risk Factor3. The Length of Time Funds Are Needed4. The Size of the Borrowing Institution5. RegulationsV. Summary of the Chapter175Concept Checks13-1. What is liability management?Liability management inv
6、olves the conscious control of the funding sources of a financial institution, using the interest rates (yields) offered on deposits and other borrowings to regulate the inflow of funds to match the banks immediate funding needs.13-2. What advantages and risks does the pursuit of liability managemen
7、t bring to a borrowing institution?Improved control over funding sources enables a borrowing institution to plan its growth more completely, but liability management opens up certain risks, particularly of the interest-rate risk and solvency (default or failure) risk variety, because it tends to be
8、more sensitive to changes in market interest rates.13-3. What is the customer relationship doctrine and what are its implications for fund-raising by lending institutions?The customer relationship doctrine places lending to customers at the top of the priority list. It argues that a lending institut
9、ion should make all good loans - that is, all loans that meet the institutions quality and profitability standards - and then find the funds needed to fund those loans they decide to make. Funds uses thus become a higher immediate priority item than funds sources.13-4. For what kinds of funding situ
10、ations are Federal funds best suited?Federal funds are best suited for institutions short of reserves to meet their legal reserve requirements or to satisfy customer loan demand. It satisfies this demand by tapping immediately usable funds.13-5. Chequers State Bank loans $50 million from its reserve
11、 account at the Federal ReserveBank of Philadelphia to First National Bank of Smithville, located in the New York Federal Reserve Banks district, for 24 hours with the funds returned the next day. Can you show the correct accounting entries for making this loan and for the return of the loaned funds
12、?Step 1 - Lending the $50 millionChequers State BankAssets LiabilitiesFederal fundssold + $50 mill.Reservesat Fed - $50 mill.176Step 2 - Using the borrowed funds can also be shown, though it is not mentioned in the problem. You could show First National Bank of Smithville making a loan for $50 milli
13、on under Assets, giving up $50 million from its reserve account.First National Bank of SmithvilleAssets LiabilitiesReserves Federal FundsAt Fed + $50 mill. Purchased +$50 mill.Step 3 - Repaying the Loan of Federal FundsChequers State BankAssets LiabilitiesReserves at Fed + $50 mill.Federalfunds sold
14、 - $50 mill.First National Bank of SmithvilleAssets LiabilitiesReservesat Fed - $50 mill.Federal fundspurchased - $50 mill.13-6. Hillside Savings Association has an excess balance of $35 million in a deposit at its principal correspondent, Sterling City Bank, and instructs the latter institution to
15、loan the funds today to another bank or thrift institution, returning them to its correspondent deposit the next business day. Sterling loans the $35 million to Imperial Security National Bank for 24 hours. Can you show the proper accounting entries for the extension of this loan and the recovery of
16、 the loaned funds by Hillside Savings?177Step 1 - Lending Federal Funds to a CorrespondentHillside Security BankAssets LiabilitiesDeposit withCorrespondent -$35 mill.Federal Fundsloaned +$35 mill.Sterling City BankAssets LiabilitiesFederal fundspurchased +$35 mill.Respondent Banks deposit -$35 mill.
17、Step 2 - The Correspondent Bank Loans Funds to Another Bank Sterling City BankAssets LiabilitiesReserves -$35 mill.Federal fundsloaned +$35 mill.Imperial Security National BankAssets LiabilitiesReserves + $35 mill. Federal fundspurchased $35 mill.178Step 3 - Repaying the Loan to the Respondent Bank
18、Hillside Security BankAssets LiabilitiesDeposit withCorrespondent +$35 mill.Federal fundsloaned -$35 mill.Sterling City BankAssets LiabilitiesFederal fundspurchased -$35 mill.Banksdeposit +$35 mill.13-7. Compare and contrast Fed funds transactions with RPs?RPs are agreements to sell securities tempo
19、rarily by a borrower of funds to a lender of funds with the borrower agreeing to buy back the securities at a guaranteed price at a set time in the future. Both are instruments available for short term borrowing. However, RP agreements are collateralized loans and thus, the lender is not exposed to
20、credit risk as they are with Federal funds transactions13-8. What are the principal advantages to the borrower of funds under an RP agreement?RPs are a low-cost and low-risk way of borrowing loanable funds for short periods of time (usually 3 or 4 days). They are low risk because they are essentiall
21、y a collateralized loan. The securities that are sold as part of the agreement act as collateral.13-9. What are the advantages of borrowing from the Federal Reserve banks or other central bank? Are there any disadvantages? What is the difference between primary, secondary, and seasonal credit? What
22、is the Lombard rate and why might such a rate be useful in achieving monetary policy goals?179Borrowing from the Federal Reserve banks is a viable alternative to the Federal funds market. These loans are made for a short term (usually two weeks. Primary credits are short term loans available to soun
23、d depositary institutions. Secondary credits are short term loans available to institutions that do not qualify for primary credit. Seasonal credit refers to loans given to small and medium sized institutions to cover seasonal swings in their deposits and loans. The Lombard rate is the Feds discount
24、 rate which is set above the Federal funds rate. If borrowing from the discount window is more expensive than the Fed funds market, banks will use the discount window less frequently and central banks do not have to restrict access to the discount window and do not have to worry about banks borrowin
25、g at the discount window and lending these funds at the Federal funds rate. Thus, the “Lombard” rate effectively acts as a ceiling on overnight borrowing rates.13-10. How is a discount window loan from the Federal Reserve secured? Is collateral really necessary for these kinds of loans?A discount wi
26、ndow loan must be secured by collateral acceptable to a Federal Reserve bank (usually U.S. government securities). Most banks keep government securities in the vaults of the Federal Reserve for this purpose. The Federal Reserve bank will also accept some government agency securities and high-grade c
27、ommercial paper as collateral.13-11. Posner State Bank borrows $10 million in primary credit from the Federal Reserve Bank of Cleveland. Can you show the correct entries for the granting and repaying this loan?The proper entries are:Step 1 - Securing a Loan from the Fed.Posner State BankAssets Liabi
28、litiesReserves on depositat the FederalReserve Bank + $10 millNotespayable +$10 mill.Federal Reserve Bank of ClevelandAssets LiabilitiesLoans andadvances +$10 mill.Bank reserveaccounts $10 mill.180Step 2 - Repaying the Loan to the Fed. Posner State BankAssets LiabilitiesReserves on depositat the Fed
29、eralReserve Bank -$10 millNotesPayable -$10 mill.Federal Reserve Bank of ClevelandAssets LiabilitiesLoans andadvances -$10 mill.Bank reserveaccounts -$10 mill.13-12. Which institutions are allowed to borrow from the Federal Home Loans Banks? Why is this source of funds becoming increasingly popular
30、for many institutions?Federal Home Loan Banks lend to institutions that grant mortgage loans and uses those as collateral. These loans are very popular because they represent a stable source of funds at below market lending rates.13-13. Why were negotiable CDs developed?Negotiable CDs were developed
31、 to attract large corporate deposits and savings from wealthy individuals. Because these were not insured they paid a higher interest rate than traditional deposits. 13-14 What are the advantages and disadvantages of CDs as a funding source?Negotiable CDs offer a way to attract large amounts of fund
32、s quickly and for a known time period. However, these funds are highly interest sensitive and often are withdrawn as soon as the maturity date arrives unless management aggressively bids in terms of yield to keep the CD.18113-15. Suppose a customer purchases a $1 million, 90-day CD, carrying a promi
33、sed 6 percent annual yield. How much in interest income will the customer earn when this 90-day instrument matures? What total volume of funds will be available to the depositor at the end of 90 days?Interest Income = Principal * Days to Maturity * Annual RateTo Customer 360 days Of Interest06.39,01
34、$= $15,000Total amount = Principal + Interestdue Customer = $1,000,000 + $15,000= $1,015,00013-16. Where do Eurodollars come from?Eurodollars arise from dollar deposits made in financial institutions and at branch offices outside U.S. territory. Many Eurodollar deposits arise from U.S. balance-of-pa
35、yments deficits that give foreigners claims on U.S. assets and from the need to pay in dollars for some international commodities (such as oil) that are denominated principally in U.S. dollars.13-17. How does a bank gain access to funds from the Eurocurrency markets?Access to these funds is obtained
36、 by contacting correspondent banks by telephone, wire, or cable.13-18. Suppose that JP Morgan Chase Bank in New York elects to borrow $250 million from Barclays Bank of London, loans the borrowed funds for a week to a security dealer, and then returns the borrowed funds. Can you trace through the re
37、sulting accounting entries? 182If, Chase borrows from Barclays Bank of London, the entries would appear as follows:JP Morgan-ChaseAssets LiabilitiesDeposits held atother banks +$250 mill.Deposits due toforeign banks +$250 mill.U.S. Bank Serving as Correspondent to BarclaysAssets LiabilitiesDeposits
38、due foreign bank -$250 mill.Deposits ofJP Morgan-Chase +$250 mill.Barclays Lending to JP Morgan-Chase BankAssets LiabilitiesDeposit at U.S.CorrespondentBank +$250 mill.Eurodollar loan toJP-Morgan ChaseBank -$250 mill.JP-Morgan Chase lending the funds to a security DealerJP Morgan ChaseLoan to Securi
39、ty Dealer +$250Deposit Held at Other Bank -$250When JP Morgan-Chase repays its loans we have:JP Morgan-Chase BankAssets LiabilitiesDeposits held atother banks -$250 mill.Deposits due toforeign banks -$250 mill.183U.S. Bank Serving as Correspondent to Foreign BankAssets LiabilitiesDeposits due tofore
40、ign banks +$250 mill.Deposits of JP Morgan-Chase Bank -$250 mill.Foreign Bank Lending EurodollarsAssets LiabilitiesDeposit at U.S.CorrespondentBank +$250 mill.Eurodollar loan toJP Morgan-ChaseBank -$250 mill.13-19. What is commercial paper? What types of organizations issue such paper?Commercial pap
41、er is a high-quality, short-term debt obligation issued by well known, large corporation with an excellent credit rating to provide for short-term cash needs. There are two types of commercial paper. The first type is industrial paper generally issued by industrial companies to purchase inventories
42、of goods or raw materials. The second type if finance paper is issued mainly by finance companies or financial holding companies to purchase loans of the books of other financial firms in the same organization so that more loans can be made.13-20. Suppose that the finance company affiliate of Citigr
43、oup issues $325 million in 90 day commercial paper to interested investors and uses the proceeds to purchase loans from Citibank. What accounting entries should be made on the balance sheets of Citibank and Citicorps finance company affiliates?The appropriate entries for the above transaction are:St
44、ep 1 - Commercial Paper is Sold by the Affiliated Finance CompanyCitibankAssets LiabilitiesFinance AffiliateAssets LiabilitiesCashAccount +$325 mill.CommercialPaper +$325 mill.184Step 2 - The Affiliated Finance Company Purchases Loans from CitibankCitibankAssets LiabilitiesLoans -$325 mill.Reserves
45、+$325 mill.Finance AffiliateAssets LiabilitiesCash Account -$325 mill.Loans Purchased from Citibank +$325 mill.13-21. What long-term nondeposit funds sources do banks and some of their closest competitors draw upon today? How do these interest costs differ from those costs associated with most money
46、 market borrowings?Long-term nondeposit funds include mortgages, capital notes, and debentures. Generally, the interest costs on these funds sources are substantially higher than money market loans but are more stable usually.13-22. What is the funds gap?The funds gap is the difference between curre
47、nt and projected credit and deposit flows that creates a need for raising additional reserves or for profitably investing any excess reserves that may arise.13-23. Suppose J.P. Morgan Chase Bank of New York discovers that projected new loan demand next week should total $325 million and customers ho
48、lding confirmed credit lines plan to draw down $510 million in funds to cover their cash needs, while new deposits next week are projected to equal $680 million. The bank also plans to acquire $420 million in corporate and government bonds next week. What is the banks projected funds gap?The expecte
49、d funds gap (with all figures in millions of dollars) would be:Projected = $325 + $510 + $420 - $680 = $575.Funds Gap13-24. What factors must the manager of a financial institution weigh in choosing among the various nondeposit sources of funding available today?185A manager must weigh factors such as relative costs, risk, length of time funds are needed, size of the institution and its funding n
