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    Commercial Bank Operations

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    Pradnyesh Ganu
    1) Commercial banks obtain funds primarily from deposits, including transaction deposits, savings deposits, time deposits, and borrowings. They use these funds mainly for loans to consumers and businesses. 2) Banks have become part of larger financial conglomerates since regulations were loosened in 1999, allowing one-stop financial services. This provides benefits to customers and diversification for the institutions. 3) Common off-balance sheet activities for banks include loan commitments, letters of credit, forward contracts, and swap contracts. These generate fee income without using the bank's balance sheet.

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    Commercial Bank Operations

    Uploaded by

    Pradnyesh Ganu
    261 views20 pages
    1) Commercial banks obtain funds primarily from deposits, including transaction deposits, savings deposits, time deposits, and borrowings. They use these funds mainly for loans to consumers and businesses. 2) Banks have become part of larger financial conglomerates since regulations were loosened in 1999, allowing one-stop financial services. This provides benefits to customers and diversification for the institutions. 3) Common off-balance sheet activities for banks include loan commitments, letters of credit, forward contracts, and swap contracts. These generate fee income without using the bank's balance sheet.

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    1) Commercial banks obtain funds primarily from deposits, including transaction deposits, savings deposits, time deposits, and borrowings. They use these funds mainly for loans to consumers and businesses. 2) Banks have become part of larger financial conglomerates since regulations were loosened in 1999, allowing one-stop financial services. This provides benefits to customers and diversification for the institutions. 3) Common off-balance sheet activities for banks include loan commitments, letters of credit, forward contracts, and swap contracts. These generate fee income without using the bank's balance sheet.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    261 views20 pages

    Commercial Bank Operations

    Uploaded by

    Pradnyesh Ganu
    1) Commercial banks obtain funds primarily from deposits, including transaction deposits, savings deposits, time deposits, and borrowings. They use these funds mainly for loans to consumers and businesses. 2) Banks have become part of larger financial conglomerates since regulations were loosened in 1999, allowing one-stop financial services. This provides benefits to customers and diversification for the institutions. 3) Common off-balance sheet activities for banks include loan commitments, letters of credit, forward contracts, and swap contracts. These generate fee income without using the bank's balance sheet.

    Copyright:

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    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 20

    Commercial Bank Operations

    Chapter Objectives

    Describe the most common sources of funds for commercial banks Describe the most common uses of funds for commercial banks Describe typical off-balance sheet activities for commercial banks

    Bank Participation in Financial Conglomerates

    Impact of the Financial Services Modernization Act (1999)

    Banks and other financial service firms were given more freedom to merge and offer a range of financial services

    Insurance Securities services

    Banks now a subsidiary of financial conglomerates


    3

    Bank Participation in Financial Conglomerates

    Benefits of diversified services to individuals and firms

    Individuals can obtain all their financial services at a single financial conglomerate
    Deposits Loans Investing Insurance

    (brokerage)

    Businesses can obtain loans, issue stocks and bonds, and have their pension fund managed by the same institution
    4

    Bank Participation in Financial Conglomerates

    Benefits of diversified services to the financial institution


    Reduce reliance on demand for single service Economies of scale and scope Diversification (service and geographical) may result in less risk Generate new business

    Bank Sources of Funds

    Transaction deposits

    Demand deposit account (checking)

    Savings Deposits

    Passbook savings

    Bank Sources of Funds

    Time Deposits

    Certificate of deposit (CD)


    No

    secondary market

    Negotiable CD
    Short-term,

    minimum $100,000 Can trade among investors via dealer

    Money Market Deposit Accounts (MMDAs)


    More liquid than CDs : no specified maturity Limited check writing Created in 1982

    Bank Sources of Funds

    Federal Funds Purchased


    Short-term loans between banks Allows banks to meet reserve requirement or funding needs Interest rate charged is the federal funds rate Borrowing at the discount window Discount rate Intended for meeting temporary short-term reserve requirement needs Must get Fed approval
    8

    Borrowing from the Federal Reserve Banks


    Bank Sources of Funds

    Repurchase agreements

    Sale of securities by one party to another with an agreement to repurchase the securities at a specified date and price Banks may sell T-bills to a corporation with temporary excess cash (bank demand deposit) and then buy them back later Source of funds for a few days Collateralized by the treasury bills
    9

    Bank Sources of Funds

    Eurodollar borrowings

    Banks outside the United States make dollardenominated loans Eurodollar market is very large Like other businesses, banks issue bonds to finance long-term fixed assets Usually subordinated to deposits Part of secondary regulatory capital

    Bonds issued by the bank


    10

    Bank Sources of Funds

    Bank capital

    Obtained from issuing stock or retaining earnings No obligation to pay out funds in the future Must be sufficient to absorb operating losses

    11

    Uses of Funds by Banks

    Loans make up about 64 percent of bank assets, while all securities make up about 22 percent of assets. Cash represents 6 percent of bank assets. Cash and due from balances at institutions

    Currency/coin provided via banks Reserve requirements imposed by Fed


    Tool

    for controlling the money supply Due from Fed and vault cash count as reserves

    Also hold cash and due from balances to maintain liquidity and accommodate withdrawal requests by depositors
    12

    Uses of Funds by Banks

    Bank Loans

    Types of business loans


    Working capital loans Term loans


    Purchasing fixed assets Protective covenants

    Informal line of credit Revolving credit loan

    13

    Uses of Funds by Banks

    Bank Loans

    Loan participations
    Sometimes

    large firms seek to borrow more money than an individual bank can provide Lead bank

    Loans supporting leveraged buyouts


    Banks

    charge a high loan rate Monitored by bank regulators

    14

    Uses of Funds by Banks

    Bank Loans

    Collateral requirements on business loans


    Increasingly

    accepting intangible assets Important to service-oriented firms Increased lending risk with service businesses--telecomm

    Types of consumer loans


    Installment

    loans Credit cards

    Real estate loans


    15

    Uses of Funds by Banks

    Investment securities (bank income and liquidity)


    Treasury securities Government agency securities


    Freddie Mac Fannie Mae Investment grade only


    16

    Corporate and municipal securities

    Federal funds sold

    Lending funds in the federal funds market

    Uses of Funds by Banks

    Repurchase agreements Eurodollar loans


    Branches of U.S. banks located outside of the U.S. Foreign-owned banks

    Fixed assets

    Office buildings Land


    17

    Off-Balance Sheet Activities

    Loan commitments

    Obligation of bank to provide a specified loan amount to a particular business upon request Note issuance facility (NIF) Banks earn fee income for risk assumed

    Standby letters of credit (SLC)

    Backs a customers obligation to a third party Banks earn fee income


    18

    Off-Balance Sheet Activities

    Forward contracts

    Agreement between a customer and bank to exchange one currency for another on a particular future date at a specified exchange rate Allows customers to hedge their exchange-rate risk

    19

    Off-Balance Sheet Activities

    Swap contracts

    Two parties agree to periodically exchange interest payments on a specified notional amount of principal Banks serve as intermediaries or dealer and/or guarantor for a fee

    20

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