CHAP_04_Managing and Pricing non-deposit liabilities

CHAP_04_Managing and Pricing non-deposit liabilities -...

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William Chittenden edited and updated the PowerPoint slides for this edition. MANAGING AND PRICING NON-DEPOSIT LIABILITIES Chapter 4
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Key topics 1. Liability management 2. Customer relationship doctrine 3. Alternative non-deposit funds sources 4. Measuring the funds gap 5. Choosing among different funds sources 6. Determining the overall cost of funds 13-2
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Customer relationship doctrine The first priority of the bank is to make loans to all qualified customers and if funds are not available the bank should seek out the lowest cost source of funding to meet customers’ needs. 13-3
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Liability management The bank buys funds in order to satisfy loan requests and reserve requirements It is an interest-sensitive approach to raising bank funds It is flexible – the bank can decide exactly how much they need and for how long The control mechanism to regulate incoming funds is the price of funds 13-4
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Nondeposit sources of funds Federal Funds Market Repurchase Agreements Federal Reserve Bank Advances from the Federal Home Loan Bank Negotiable CDs Eurocurrency Deposit Market Commercial Paper Long Term Sources 13-5
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Recent Growth in Non-deposit Sources of Borrowed Funds at FDIC-Insured Institutions What are the trends? 13-6
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Alternative non-deposit sources of funds The usage of non-deposit sources of funds has risen Larger institutions rely on the non-deposit funds market as a key source of short-term money to meet loan demand and unexpected cash emergencies 13-7
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Federal funds market Immediately available reserves are traded between financial institution and usually returned within 24 hours, although maturities are negotiated and can extend up to several weeks Deposits with correspondent banks and demand deposit balances of security dealers and governments can be used for loans to institutions. Interest rates are negotiated between trading partners and are quoted on a 360-day basis 13-8
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13-9
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Types of Fed funds loan agreements Overnight loans Negotiated via wire or telephone, returned the next day Normally not secured by specific collateral, although might Term loans Longer term Fed funds contracts (several days, weeks, or months) Continuing contracts Automatically renewed each day Normally between smaller respondent institutions and their larger correspondents 13-10
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Repurchase agreements (Repos) Can be thought of as collateralized FED funds transactions; more complex; less exposure to credit risk Involves the temporary sale of high-quality assets (usually Government securities) accompanied by an agreement to buy back those assets on a specific future date at a predetermined price or yield 13-11
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CHAP_04_Managing and Pricing non-deposit liabilities -...

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