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Unformatted text preview: CHAPTER 13 MANAGING NONDEPOSIT LIABILITIES AND OTHER SOURCES OF BORROWED FUNDS Goal 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 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 Funds Chapter Outline I. Introduction II. Liability Management and the Customer relationship Doctrine A. Customer Relationship Doctrine B. Purpose of Liability Management Ill. Alternative Nondeposit Sources of Funds A. Federal Funds Market B. Repurchase Agreements as a Source of Bank Funds C. Borrowing from the Federal Reserve Bank in the District D. Advances from Federal Home Loan Banks E. Development and Sale of Large Negotiable CDs F. Eurocurrency Deposit Market G. Commercial Paper Market E. Long-Term Nondeposit Funds Sources IV. Choosing Among Alternative Nondeposit Sources A. Measuring a Financial Firms Total Need for Nondeposit Funds: The Funds Gap B. Nondeposit Funding Sources: Factors to Consider 1. Relative Costs 2. The Risk Factor 3. The Length of Time Funds Are Needed 4. The Size of the Borrowing Institution 5. Regulations V. Summary of the Chapter 174 Concept 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 bank's 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 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 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 institution should make all good loans - that is, all loans that meet the institution's 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....
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