SC5-Chapters 17 & 18- Managing Liquidity Risk & Liability and Liquidity Mgt2

SC5-Chapters 17 & 18- Managing Liquidity Risk & Liability and Liquidity Mgt2

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3/17/11 11 Liabilities as a Source of Liquidity Note: The importance of deposits as a funding source for bank assets is declining for both large and small banks asset growth exceeds deposit growth Competition for bank core deposits has increased, driving up their cost Banks must rely more on noncore deposits and borrowed funds (non-
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3/17/11 22 Liabilities as a Source of Liquidity Noncore deposits and borrowed funds include: large denomination (jumbo CDs) brokered deposits Fed Funds purchased and RPs Sold FHLB advances and Mid-term CDs
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3/17/11 33 Liabilities as a Source of Liquidity Fed Funds Purchased, RPs Sold, and Jumbo CDs are typically a short-term source of funds Brokered deposits and especially FHLB Advances offer a wider range of maturities and can be used to fund a variety of loans today approximately 46% of US banks have loans with the FHLB and these loans fund 5% of US banking assets No reserve requirement, no deposit insurance costs
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3/17/11 44 FHLB Advances-info Currently banks are using $237 b. of FHLB advances or about 52% of all FHLB Adv. Outstanding 34% used to fund loan growth 22% used to fund security purchases 12% used to provide short-term liquidity
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3/17/11 55 Brokered Deposits-info Definition- any deposit obtained from/through a deposit broker Deposit Broker – any person engaged in the business of placing deposits or facilitating the placement of deposits with insured depository institutions for a 3rd party Currently 3,341 banks that accept brokered deposits Brokered deposits in 2007 were $540 b. A well-capitalized & insured bank can solicit, accept, renew & rollover Brokered Deposits without restrictions
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3/17/11 66 Costs of Using Liabilities to Meet Liquidity Needs There are essentially four costs associated with using liabilities to meet liquidity needs interest expense servicing costs acquisition costs insurance costs
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3/17/11 77 Marginal Cost of Liability j
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This note was uploaded on 03/16/2011 for the course FIN 4324 taught by Professor Clark during the Spring '11 term at FSU.

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SC5-Chapters 17 & 18- Managing Liquidity Risk & Liability and Liquidity Mgt2

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