1、Chapter 13 - Managing Nondeposit Liabilities13-1CHAPTER 13MANAGING NONDEPOSIT LIABILITIESGoal 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 choos
2、e among the 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 Ou
3、tlineI. IntroductionII. Liability Management and the Customer Relationship DoctrineA. Customer Relationship DoctrineB. Liability ManagementIll. Alternative Nondeposit Sources of FundsA. Federal Funds Market (“Fed Funds”)B. Repurchase Agreements as a Source of FundsC. Borrowing from Federal Reserve B
4、anks1. Primary Credit2. Secondary Credit3. Seasonal CreditD. 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
5、a Financial Firms Total Need for Nondeposit Funds: The Available 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 ChapterChapter 13 - Managing No
6、ndeposit Liabilities13-2Concept Checks 13-1. What is liability management?Liability management involves 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 ban
7、ks immediate funding needs.13-2. What advantages and risks does the pursuit of liability management 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
8、 of the interest-rate risk and solvency (default or failure) risk variety, because it tends to be more sensitive to changes in market interest rates.13-3. What is the customer relationship doctrine, and what are its implications for fundraising by lending institutions?The customer relationship doctr
9、ine places lending to customers at the top of the priority list, which proclaims that the first priority of a lending institution is to make loans to all those customers from whom the lender expects to receive positive net earnings. It argues that a lending institution should make all good loans tha
10、t 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 situations are Federal funds best suited?F
11、ederal 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 account at the Federal ReserveBank of
12、 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?Chapter 13 - Managing Nondeposit Liab
13、ilities13-3Step 1 - Lending the $50 millionChequers State BankAssets LiabilitiesFederal fundssold + $50 mill.Reservesat Fed - $50 mill.Step 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 $5
14、0 million 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.Federalfun
15、ds sold - $50 mill.First National Bank of SmithvilleAssets LiabilitiesReservesat Fed - $50 mill.Federal fundspurchased - $50 mill.Chapter 13 - Managing Nondeposit Liabilities13-413-6. Hillside Savings Association has an excess balance of $35 million in a deposit at its principal correspondent, Sterl
16、ing City Bank, and instructs the latter institution to 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 ent
17、ries for the extension of this loan and the recovery of the loaned funds by Hillside Savings?Step 1 - Lending Federal Funds to a CorrespondentHillside Security BankAssets LiabilitiesDeposit withCorrespondent -$35 mill.Federal Fundsloaned +$35 mill.Sterling City BankAssets LiabilitiesFederal fundspur
18、chased +$35 mill.Respondent Banks deposit -$35 mill.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.C
19、hapter 13 - Managing Nondeposit Liabilities13-5Step 3 - Repaying the Loan to the Respondent Bank Hillside Security BankAssets LiabilitiesDeposit withCorrespondent +$35 mill.Federal fundsloaned -$35 mill.Sterling City BankAssets LiabilitiesFederal fundspurchased -$35 mill.Banksdeposit +$35 mill.13-7.
20、 Compare and contrast Fed funds transactions with RPs?Less popular than Fed funds and more complex are repurchase agreements (RPs). RPs are agreements to sell securities temporarily by a borrower of funds to a lender of funds with the borrower agreeing to buy back the securities at a guaranteed pric
21、e 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 credit risk as they are with Federal funds transactions. Most RPs are transacted across the Fed Wire system, just as are Fed
22、funds transactions. RPs may take a bit longer to transact then a Fed funds loan because the seller of funds (the lender) must be satisfied with the quality and quantity of securities provided as collateral.13-8. What are the principal advantages to the borrower of funds under an RP agreement?RPs are
23、 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 essentially 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
24、Federal Reserve banks or other central bank? Are there any disadvantages? What is the difference between primary, secondary, and seasonal credit? What is the Lombard rate and why might such a rate be useful in achieving monetary policy goals?Chapter 13 - Managing Nondeposit Liabilities13-6Borrowing
25、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 sound depositary institutions. Secondary credits are short term loans available to institutions that do not
26、 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 rate which is set above the Federal funds rate. If borrowing from the discount window is more expensive
27、 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 borrowing at the discount window and lending these funds at the Federal funds rate. Thus, the “Lombard” rate eff
28、ectively 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 window loan must be secured by collateral acceptable to a Federal Reserve bank (usually U.S. government se
29、curities). 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 commercial paper as collateral.Each type of discount window loan carries its own loan rate, with secondar
30、y credit generally posting the highest interest rate and seasonal credit the lowest. For example, in March 2008 the Federal Reserves discount window loan rates were 2.50 percent for primary credit, 3.00 percent for secondary credit, and 2.95 percent for seasonal credit. 13-11. Posner State Bank borr
31、ows $10 million in primary credit from the Federal Reserve Bank of Cleveland. Can you show the correct entries for granting and repaying this loan?The proper entries are:Step 1 - Securing a Loan from the Fed.Posner State BankAssets LiabilitiesReserves on depositat the FederalReserve Bank + $10 millN
32、otespayable +$10 mill.Federal Reserve Bank of ClevelandAssets LiabilitiesLoans andadvances +$10 mill.Bank reserveaccounts $10 mill.Chapter 13 - Managing Nondeposit Liabilities13-7Step 2 - Repaying the Loan to the Fed. Posner State BankAssets LiabilitiesReserves on depositat the FederalReserve Bank -
33、$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 so popular for many institutions?Federal Home Loan Banks
34、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 to attract large corporate deposits and savin
35、gs from wealthy individuals. Because these were not insured they paid a higher interest rate than traditional deposits. The concept of liability management and short-term borrowing to supplement depositgrowth was given a significant boost early in the 1960s with the development of negotiable CD.13-1
36、4 What are the advantages and disadvantages of CDs as a funding source?Negotiable CDs offer a way to attract large amounts of funds 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 a
37、ggressively bids in terms of yield to keep the CD.13-15. Suppose a customer purchases a $1 million, 90-day CD, carrying a promised 6 percent annualized yield. How much in interest income will the customer earn when this 90-day instrument matures? What total volume of funds will be available to the d
38、epositor at the end of 90 days?Interest Income = Principal * Days to Maturity * Annual RateTo Customer 360 days Of Interest06.39,01$Chapter 13 - Managing Nondeposit Liabilities13-8= $15,000Total amount = Principal + Interestdue Customer = $1,000,000 + $15,000= $1,015,00013-16. Where do Eurodollars c
39、ome 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-payments deficits that give foreigners claims on U.S. assets and from the need to pay in dollars for some international com
40、modities (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 by contacting correspondent banks by telephone, wire, or cable.13-18. Suppose that JP Morgan Chase Bank in New York elec
41、ts 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 resulting accounting entries? If, Chase borrows from Barclays Bank of London, the entries would appear as follows:JP Morgan
42、-ChaseAssets LiabilitiesDeposits held atother banks +$250 mill.Deposits due toforeign banks +$250 mill.Chapter 13 - Managing Nondeposit Liabilities13-9U.S. Bank Serving as Correspondent to BarclaysAssets LiabilitiesDeposits due foreign bank -$250 mill.Deposits ofJP Morgan-Chase +$250 mill.Barclays L
43、ending 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 Security Dealer +$250Deposit Held at Other Bank -$250When JP Morgan-Chase repays i
44、ts loans we have:JP Morgan-Chase BankAssets LiabilitiesDeposits held atother banks -$250 mill.Deposits due toforeign banks -$250 mill.U.S. Bank Serving as Correspondent to Foreign BankAssets LiabilitiesDeposits due toforeign banks +$250 mill.Deposits of JP Morgan-Chase Bank -$250 mill.Chapter 13 - M
45、anaging Nondeposit Liabilities13-10Foreign 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 paper consists of short-term note
46、s, with maturities ranging from three or four days to nine months, issued by well-known companies to raise working capital. The notes are generally sold at a discount from their face value through security dealers or through direct contact between the issuing company and interested investors.Commerc
47、ial paper is a high-quality, short-term debt obligation 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 of goods or raw materials. The se
48、cond 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 Citigroup issues $325 million in 90 day
49、 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 Citigroups finance company affiliates?The appropriate entries for the above transaction are:Step 1 - Commercial Paper is Sold by the Affiliated Finance CompanyCitibankAssets LiabilitiesFinance AffiliateAssets LiabilitiesCashAccount +$325 mill
