Financial Markets and Institutions: Chapter 17

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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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Nội dung Text: Financial Markets and Institutions: Chapter 17

Financial Markets and Institutions Abridged 10th Edition 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 Banking 2 © 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 Chapter Objectives ■ 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 offbalance sheet activities for commercial banks © 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 Bank Market Structure n Interstate banking regulations were changed in 1994 to allow banks more freedom to acquire other banks across state lines. n The number of banks has declined over time, thereby increasing concentration in the banking industry. n Many banks are owned by bank holding companies allowing more flexibility to borrow funds, issue stock, repurchase the company’s own stock, and acquire other firms. 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: Federal Reserve. 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 Deposit Accounts n Transaction deposits n Savings deposits n Time deposits n Money market deposit accounts n Borrowed Funds n Federal funds purchased (borrowed) n Borrowing from the Federal Reserve banks n Repurchase agreements n Eurodollar borrowings n LongTerm Sources of Funds n Bonds issued by the bank n Bank capital 6 © 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 Transaction Deposits n A demand deposit account, or checking account, is offered to customers who desire to write checks. n A conventional demand deposit account requires a small minimum balance and pays no interest. n A negotiable order of withdrawal (NOW) account pays interest and provides checking services. n Electronic Transactions Some transactions originating from transaction accounts have become much more efficient as a result of electronic banking. (direct deposit accounts, computer banking, preauthorized debits) 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 Savings Deposits n The traditional savings account is the passbook savings account, which does not permit check writing. Time Deposits n Deposits that cannot be withdrawn until a specified maturity n Certificates of Deposit (or retail CDs) require a specified minimum amount of funds to be deposited for a specified period of time. Recently callable CDs have been issued. n Negotiable Certificates of Deposit – Have a specified maturity and require a minimum deposit. Maturities are typically short term, and the minimum deposit is $100,000. A secondary market for NCDs does exist. 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 Money Market Deposit Accounts n Differ from conventional time deposits in that they do not specify a maturity. n Provide limited checkwriting ability, require a larger minimum balance, and offer a higher yield. Federal Funds Purchased n Represent a liability to the borrowing bank and an asset to the lending bank. (typically for one to seven days) n Intent is to correct shortterm fund imbalances by banks. n The interest rate charged in the federal funds market is called the federal funds rate. 9 © 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 Borrowing from the Federal Reserve Banks n The Federal Reserve district banks regulate certain activities of banks and provide shortterm loans to banks. n Often referred to as borrowing at the discount window. n The interest rate charged is the primary credit lending rate. n Mainly used to resolve a temporary shortage of funds. Repurchase Agreements n Represents the sale of securities with an agreement to repurchase the securities at a specified date and price. n Occur through a telecommunications network connecting large banks. 10 © 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 Eurodollar Borrowings n May borrow dollars from those banks outside the United States (typically in Europe) that accept dollardenominated deposits, or Eurodollars. Bonds Issued by the Bank n Banks own fixed assets such as land, buildings, and equipment which are usually financed with longterm sources such as the issuance of bonds. n Common purchasers of these bonds are households and various financial institution. 11 © 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 Bank Capital n Represents funds acquired by the issuance of stock or the retention of earnings. n A bank’s capital must be sufficient to absorb operating losses in the event that expenses or losses exceed revenues, regardless of the reason for the losses. n In 1988, regulators imposed new, riskbased capital requirements that were completely phased in by 1992. Under this system, the required level of capital for each bank depends on its risk. Distribution of Bank Sources of Funds n Smaller banks rely on savings deposits while larger banks rely more on short term borrowings. 12 © 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 17.2 Bank Sources of Funds (as a Proportion of Total Liabilities) Source: Federal Reserve. 13 © 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.
Uses of Funds by Banks n Cash n Bank loans n Investment in securities n Federal funds sold (loaned out) n Repurchase agreements n Eurodollar loans n Fixed assets n Proprietary trading 14 © 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.
Uses of Funds by Banks Cash n Banks must hold some cash as reserves to meet the reserve requirements enforced by the Federal Reserve. n Because banks do not earn income from cash, they hold only as much cash as is necessary to maintain a sufficient degree of liquidity. n Banks hold cash in their vaults and at their Federal Reserve district bank. 15 © 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.
Uses of Funds by Banks Bank Loans n Types of Business Loan n Working capital loan (sometimes called a selfliquidating loan) designed to support ongoing business operations. n Term loans primarily to finance the purchase of fixed assets such as machinery. n Informal line of credit allows the business to borrow up to a specified amount within a specified period of time. n Revolving credit loan obligates the bank to offer up to some specified maximum amount of funds over a specified period of time. n Prime rate Interest rate charged by banks on loans to their most creditworthy customers. (See Exhibit 17. 3) 16 © 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 17.3 Prime Rate over Time Source: Federal Reserve. 17 © 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.
Uses of Funds by Banks Bank Loans (Cont.) n Loan Participations n One bank serves as the lead bank by arranging for the documentation, disbursement, and payment structure of the loan. n Other banks supply funds that are channeled to the borrower by the lead bank. n Loans Supporting Leveraged Buyouts n A management group or a business relies mostly on debt to purchase the equity of another business. n Firms request LBO financing because they perceive that the market value of certain publicly held shares is too low. 18 © 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.
Uses of Funds by Banks Bank Loans (Cont.) n Collateral Requirements on Business Loans n Commercial banks are increasingly accepting intangible assets (such as patents, brand names, and licenses to franchises and distributorships) as collateral. n Lender Liability on Business Loans n In recent years, businesses that previously obtained loans from banks have filed lawsuits claiming that the banks terminated further financing without sufficient notice. n Volume of Business Loans n When the economy is strong, businesses are more willing to finance expansion. 19 © 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.
Uses of Funds by Banks Bank Loans (Cont.) n Types of Consumer Loans n Installment loans – Loans to finance purchases of cars and household products. n Banks also provide credit cards to consumers who qualify, enabling them to purchase various goods without having to reapply for credit on each purchase. n Since the interest rate on credit card loans and personal loans is typically much higher than the cost of funds, many commercial banks have pursued these types of loans as a means of increasing their earnings. 20 © 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.