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Depository Institutions
Include:
Include:
Banks
Savings & Loan institutions
Savings Banks
Credit Unions
Asset/liability problem of Depository
institutions
3 ways:
Loans
Make direct loans to entities
Securities investments
Investing in securities & holding portfolios
Fees
Charged to their customers
Asset/liability problem of Depository
institutions
Risks faced by the depository institutions
Threats of positioning:
Deposits
Nondeposit borrowing
Common stocks and retained earnings
Bank Funding
Deposits
Demand deposits
Savings deposits
Time deposits
Bank Funding
Reserve requirements and borrowing in
the federal funds market
All banks must maintain a specified
percentage of their deposits in a non-
interest bearing account at the State bank.
Reserve ratio
Required reserve
Bank Funding
Excess reserves- when actual reserves exceed
required reserves.
Banks temporarily short of funds can borrow
reserves from banks that have excess reserves.
The market where banks can borrow or lend
reserves is called the federal funds market.
The interest rate that is charged to borrow funds
in this market is called the federal funds rate.
Bank Funding
Borrowing at the Fed discount window:
Banks temporarily short of funds can
borrow from the Fed at its discount window
Collateral is necessary to borrow
Discount rate- the interest rate that the Fed
charges to borrow funds at the discount
window
Borrowing from the Fed is done basically
to meet short term liquidity needs
Bank Funding
Other non deposit borrowing
Issuing obligations in the money market,
or intermediate to long term in the form of
issuing securities in the bond market.
Regulation
Ceilings imposed on the interest rates that can
be paid on deposit accounts
Problem:
Maturity matching problem
Savings and loan Associations
Otherinvestments:
Consumer loans( loans for home
improvement , automobiles, education , business
or credit cards)
Non consumer loans ( commercial , corporate
, business or agriculture loans)
Junk bonds
Investment in short term assets for
operational or regulatory purposes.
Savings and loan Associations
Funding:
Savings and time deposits
Negotiable order of withdrawal (NOW)
accounts
Money market deposit accounts (MMDA)
The S&L Crisis
Credit unions
“Common bond” requirement for credit
union membership
No corporate ownership
Purpose:
Serve member’s saving and borrowing
needs
Credit unions are owned by their
members, member deposits are called
shares.