Chapter 11(6) Managing Nondeposi

Liability Management and the Customer Relationship Doctrine

• The Customer Relationship Doctrine
  • The first priority of a lending institution-- make loans to all those customers from whom the lender expects to receive positive net earnings
• Lending decisions often precede funding decisions
  • All loans and investments whose returns exceed their cost and whose quality meets the lending institution’s credit standards should be made
• 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

Alternative Nondeposit Sources of Funds

• Federal Funds Market
• Repurchase Agreements
• Borrowing from Federal Reserve Banks
• Negotiable CDs
• Eurocurrency Deposit Market
• Commercial Paper
• Long-Term Nondeposit Funds Sources

Federal Funds Market

Federal funds: short-term borrowings of immediately available
money

Origin:

Deposits * Reserve ratio = Reserves
超额部分为超额准备金，可用于拆借给其他银行 => Fed Fund Sold & 借入行 => Fed Fund Purchases

Source:

1. deposits held at the Federal Reserve banks.
2. deposits with correspondent banks
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Types of Fed Funds Loan Agreements (difference: 抵押)

1. Overnight Loans
   • Unwritten agreements, negotiated via wire or telephone, returned the next day
   • Normally not secured by specific collateral (sometimes there are collaterals required)
2. Term Loans
   • Longer term Fed funds contracts (several days, weeks, or months)
   • Written contracts
3. Continuing Contracts
   • Automatically renewed each day
   • Normally between smaller respondent institutions and their larger correspondents

Repurchase Agreements (RPs) as a Source of Funds

• Loss popular than Fed funds and more complex
• Viewed as collateralized Fed funds transactions
• collaterals in the form of marketable securities provided, reducing the credit risk
• Most domestic RPs are transacted across the Fed Wire system
• An RP transaction is often for overnight funds
  • It may be extended for days, weeks, or even months

CLAC:

Interest cost of RP = Amount borrowed * Number of days in RP borrowing / 360 days

Borrowing from Federal Reserve Banks

• The loans are made through its discount window by crediting the borrowing institution’s reserve account
• Each loan must be backed by collateral acceptable to the Fed
• In China, commercial banks can borrow from the central bank through its discount window or on credit.

Development and Sale of Large Negotiable CDs

An interest-bearing receipt evidencing the deposit of funds in the bank for a specified period of time for a specified interest rate or specified formula for calculating the interest rate

• a hybrid account:
  • legally a deposit
  • a IOU in practical terms (IOU = i owe you 金融要求权;借据)
• Maturities: ranging from seven days to one or two years
• Negotiable: can be sold any number of times
• Modest cost, large volume and flexibility
  Reserves increase. <=> Borrowings from the centural bank increase.
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Types:

• Domestic CDs: issued by U.S. institutions in U.S.
• Euro CDs: issued by banks outside U.S. denominated in dollar
• Yankee CDs: issued by foreign banks in U.S.
• Thrift CDs: issued by nonbank savings institutions
• Fixed-rate CDs: the majority
• Variable-rate CDs: interest rate will be reset after a designated period of time.