Bank Mgt. 5th Ed, Chapter 6

Bank Mgt. 5th Ed, Chapter 6 - Chapter 6 Chapter The...

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Unformatted text preview: Chapter 6 Chapter The Acquisition & The Cost of Bank Funds Cost Noncapital Sources of Funds Noncapital s Demand Deposits s NOW & Super NOW Accounts s Savings Deposits s Money Market Accounts s Time Deposits s Brokered Deposits Brokered s Public Deposits s Correspondent Deposits Demand Deposits Demand s Non-interest bearing transaction deposits s No maturity s Must be paid by the bank when a negotiable Must instrument is presented in the form of a check or electronic impulse. check s Normally bank’s lowest source of funding. Normally NOW & Super NOW Accounts NOW s Interest-bearing checking accounts. s No regulatory maximum rate. s No maturity date. s Difference between NOW & Super NOW is Difference that Super NOW pays a higher interest rate, but have higher minimum balances & restrictions on activity. restrictions Savings Deposits Savings s Interest-bearing deposits. s No specific maturity. s Not subject to checking. s Can be withdrawn at any time in-bank. Money Market Accounts Money s Savings deposits of individuals & Savings partnerships. partnerships. s No rate maximums. s Instrument that competes with money Instrument market mutual funds. market s Four withdrawals by check per quarter, but Four unlimited in-bank. unlimited Time Deposits Time s Time deposits differ from savings primarily Time because they have predetermined maturity date & withdrawals prior to maturity are subject to penalties. subject s Deposits have no rate limit or deposit Deposits minimum. minimum. s Categories of time deposits: – – – CDs of $100,000 or more. Other time deposits of $100,000 or more. Time deposits under $100,000. Brokered Deposits Brokered s Large & small time deposits obtained from Large intermediaries seeking insured-deposits on behalf of their customers. behalf s Bank regulators oppose brokered deposits. Public Deposits Public s Demand, time, or savings deposits of Demand, governmental units. governmental s Deposits generally require collateral in the Deposits form of securities. form Correspondent Deposits Correspondent s Deposits of other banks. s Mostly demand with some time deposits. s Deposits are used in most cases to pay for Deposits services received. services Non-deposit Short-term Funds Non-deposit s Borrowing from Federal Reserve. s Federal funds purchased. s Securities sold under agreement (repos). s Eurodollar & other foreign sources. s Bankers’ acceptances. s Other liability forms. Measuring & Using The Cost of Funds Funds s A bank will generally seek the lowest cost of bank funds in its market. funds s A reasonably accurate cost of funds measure reasonably is necessary to determine the returns a bank must obtain on earning assets. s The types of sources of funds a bank obtains The & the employment of these sources have a major impact on the bank’s risks. major Measuring & Using The Cost of Funds Funds s Historic average cost of funds. s Marginal cost of funds. s Pooled marginal cost of funds. s Weighted average projected cost. Risks Associated With Raising Funds Funds s Liquidity risk. s Interest rate risk associated with funding. s Interactions with credit risk. s Interactions with capital risk. Basic Funding Strategies Basic s Product development. s Market segmentation. s Product differentiation & image. s Product attraction. s Non-deposit sources. s Future possibilities. ...
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