Financial Markets and Institutions: Chapter 17

Chapter 17 Commercial Bank Operations: describe the market structure of commercial banks, describe the most common sources of funds for commercial banks, explain the most common uses of funds for commercial banks, describe typical off-balance sheet activities for commercial banks.
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Financial Markets and Institutions: Chapter 17 FinancialMarketsandInstitutions Abridged10thEdition by Jeff Madura © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.1 Part 6 Commercial Banking2 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 Commercial Bank Operations ChapterObjectives ■ describethemarketstructureofcommercialbanks ■ describethemostcommonsourcesoffundsfor commercialbanks ■ explainthemostcommonusesoffundsfor commercialbanks ■ describetypicaloffbalancesheetactivitiesfor commercialbanks © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.3 Background on Commercial Banks BankMarketStructure n Interstatebankingregulationswerechangedin1994toallowbanksmore freedomtoacquireotherbanksacrossstatelines. n Thenumberofbankshasdeclinedovertime,therebyincreasing concentrationinthebankingindustry. n Manybanksareownedbybankholdingcompaniesallowingmore flexibilitytoborrowfunds,issuestock,repurchasethecompany’sown stock,andacquireotherfirms.4 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Exhibit 17.1 Consolidation among Commercial Banks over Time Source:FederalReserve.5 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank Sources of Funds n DepositAccounts n Transactiondeposits n Savingsdeposits n Timedeposits n Moneymarketdepositaccounts n BorrowedFunds n Federalfundspurchased(borrowed) n BorrowingfromtheFederalReservebanks n Repurchaseagreements n Eurodollarborrowings n LongTermSourcesofFunds n Bondsissuedbythebank n Bankcapital6 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank Sources of Funds TransactionDeposits n Ademanddepositaccount,orcheckingaccount,isofferedtocustomerswho desiretowritechecks. n Aconventionaldemanddepositaccountrequiresasmallminimumbalanceandpays nointerest. n Anegotiableorderofwithdrawal(NOW)accountpaysinterestandprovideschecking services. n ElectronicTransactionsSometransactionsoriginatingfromtransaction accountshavebecomemuchmoreefficientasaresultofelectronicbanking. (directdepositaccounts,computerbanking,preauthorizeddebits)7 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank Sources of Funds SavingsDeposits n Thetraditionalsavingsaccountisthepassbooksavingsaccount,whichdoesnot permitcheckwriting. TimeDeposits n Depositsthatcannotbewithdrawnuntilaspecifiedmaturity n CertificatesofDeposit(orretailCDs)requireaspecifiedminimumamountof fundstobedepositedforaspecifiedperiodoftime.RecentlycallableCDshave beenissued. n NegotiableCertificatesofDeposit–Haveaspecifiedmaturityandrequirea minimumdeposit.Maturitiesaretypicallyshortterm,andtheminimumdeposit is$100,000.AsecondarymarketforNCDsdoesexist.8 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank Sources of Funds MoneyMarketDepositAccounts n Differfromconventionaltimedepositsinthattheydonotspecifyamaturity. n Providelimitedcheckwritingability,requirealargerminimumbalance,and offerahigheryield. FederalFundsPurchased n Representaliabilitytotheborrowingbankandanassettothelendingbank. (typicallyforonetosevendays) n Intentistocorrectshorttermfundimbalancesbybanks. n Theinteres ...