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Commercial Bank Operations

This document summarizes various sources of funds and uses of funds for commercial banks. It discusses how banks obtain transaction deposits, savings deposits, time deposits, and other sources of funds. It also outlines how banks use these funds, primarily for loans but also for investing in securities, federal funds transactions, and off-balance sheet activities like loan commitments and letters of credit. The document provides an overview of major bank operations and financial activities.

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Meilin Denise MEDRANA
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98 views2 pages

Commercial Bank Operations

This document summarizes various sources of funds and uses of funds for commercial banks. It discusses how banks obtain transaction deposits, savings deposits, time deposits, and other sources of funds. It also outlines how banks use these funds, primarily for loans but also for investing in securities, federal funds transactions, and off-balance sheet activities like loan commitments and letters of credit. The document provides an overview of major bank operations and financial activities.

Uploaded by

Meilin Denise MEDRANA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Medrana, Meilin Denise D.

➢ Federal Funds Purchased


AIS2B o Short-term loans between banks
o Allows banks to meet reserve requirement or
Commercial Bank Operations funding needs
o Interest rate charged is the federal funds rate
Bank Participation in Financial Conglomerates
➢ Impact of the Financial Services Modernization ➢ Borrowing from the Federal Reserve Banks
Act (1999) o Borrowing at the discount window
• Banks and other financial service firms were o Discount rate
given more freedom to merge and offer a o Intended for meeting temporary short-term
range of financial services reserve requirement needs
✓ Insurance o Must get Fed approval
✓ Securities services
➢ Banks now a subsidiary of financial ➢ Bank capital
conglomerates o Obtained from issuing stock or retaining
➢ Benefits of diversified services to individuals and earnings
firms o No obligation to pay out funds in the future
• Individuals can obtain all their financial o Must be sufficient to absorb operating losses
services at a single financial conglomerate
Deposits Uses of Funds by Banks
Loans
Investing (brokerage) ➢ Loans make up about 64 percent of bank assets,
Insurance while all securities make up about 22 percent of
• Businesses can obtain loans, issue stocks assets. Cash represents 6 percent of bank
and bonds, and have their pension fund assets.
managed by the same institution ➢ Cash and “due from” balances at institutions
• Currency/coin provided via banks
➢ Benefits of diversified services to the financial • Reserve requirements imposed by Fed
institution ✓ Tool for controlling the money supply
o Reduce reliance on demand for single ✓ Due from Fed and vault cash count as
service reserves
o Economies of scale and scope • Also hold cash and due from balances to
o Diversification (service and geographical) maintain liquidity and accommodate
may result in less risk withdrawal requests by depositors
o Generate new business
➢ Bank Loans
Bank Sources of Funds • Types of business loans
 Working capital loans
➢ Transaction deposits  Term loans
o Demand deposit account (checking) ✓ Purchasing fixed assets
➢ Savings Deposits ✓ Protective covenants
o Passbook savings  Informal line of credit
 Revolving credit loan
➢ Time Deposits
o Certificate of deposit (CD) • Loan participations
– No secondary market
 Sometimes large firms seek to borrow
o Negotiable CD
more money than an individual bank can
– Short-term, ex. minimum P100,000
provide
– Can trade among investors via dealer
 Lead bank
➢ Money Market Deposit Accounts (MMDAs) • Loans supporting leveraged buyouts
o More liquid than CDs: no specified maturity  Banks charge a high loan rate
o Limited check writing  Monitored by bank regulators
o Created in 1982
• Collateral requirements on business loans • Swap contracts
o Increasingly accepting intangible assets ✓ Two parties agree to periodically exchange
o Important to service-oriented firms interest payments on a specified notional
o Increased lending risk with service amount of principal
businesses--telecom ✓ Banks serve as intermediaries or dealer
• Types of consumer loans and/or guarantor for a fee
o Installment loans
o Credit cards
• Real estate loans

• Investment securities (bank income and


liquidity)
o Treasury securities
o Government agency securities
o Corporate and municipal securities
 Investment grade only
• Federal funds sold
o Lending funds in the federal funds market

• Repurchase agreements
• Eurodollar loans
✓ Branches of U.S. banks located outside of
the U.S.
✓ Foreign-owned banks
• Fixed assets
✓ Office buildings
✓ Land

Off-Balance Sheet Activities

• Loan commitments
✓ Obligation of bank to provide a specified
loan amount to a particular business upon
request
✓ Note issuance facility (NIF)
✓ Banks earn fee income for risk assumed

• Standby letters of credit (SLC)


✓ Backs a customer’s obligation to a third
party
✓ Banks earn fee income

• Forward contracts
✓ Agreement between a customer and bank to
exchange one currency for another on a
particular future date at a specified
exchange rate
✓ Allows customers to hedge their exchange-
rate risk

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