nondep13 - 1 Managing Nondeposit Liabilities, CH. 13, Rose...

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1 Customer relationship doctrine - the first priority is to make loans to all those customers from whom the bank expects to receive positive net earnings: thus, nondeposit funds may be necessary to fulfill this priority. Large domestic and foreign deposits are included in this category of nondeposit funds. Alternative Sources of Nondeposit funds - see p.422-423, Tables 13-2, 13-3 of examples and relative sizes Know general descriptions and characteristics of each with respect to default risk, deposit insurance premiums, transaction costs Federal funds (pp. 422-425)- short-term borrowing of immediately available money, usually in the form of deposits at the Fed or correspondent banks that do not earn interest or collected demand deposits of securities dealers and governments, as of (6/30/09) net Fed funds position for all CBs = (FFS - FFP)/TA = [(535B - 758B)/11,895B] = [(4.50% - 6.37%)/100%] = -1.87% (-2.15% banks > $1B in TA; +3.02% banks < %100M) Source: FDIC Statistics on Banking (www2.fdic.gov/SDI/SOB). Note: source of negative funds is FED or securities dealers. no reserve requirements unsecured so there may be default risk 3 types - (1) overnight, (2) term loans - several days, weeks or longer (3) continuing contracts - usually between smaller respondent bank and larger correspondent bank rates are more volatile than other short-term sources and fluctuate depending on the demand and supply for excess reserves, e.g., the standard deviation for the following rates for 7/27/07 to 2/27/09 are Fed Funds (1.65%), 3-month LIBOR (1.29%), 3-month financial commercial paper (1.33%), and 3- month Treasury securities (1.35%); know current Fed Funds target rate at time of test. Repurchase Agreements
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nondep13 - 1 Managing Nondeposit Liabilities, CH. 13, Rose...

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