source of fund(bank's liability)

8/11/2019 Source of Fund(Bank's Liability)

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1. Sources of Funds-Banks Liabilities

Bank liabilities are the debts incurred by a bank, what a bank owes. While a bank is bound to

have traditional business liabilities and debts (for electricity, office supplies, employee wages),

the bulk of a bank's liabilities are financial orlegal claimsor IOUs issued by the bank. The most

important liability category is depositsfinancial wealth that others have placed with the bank for

safekeeping. The bank owes this wealth to these depositors.

Similar to the balance sheet of any other firm, the banks balance sheet also has assets that

represent Application of Funds to generate revenue for the bank and liabilities and net worth that

form the Sources of the banks funds. However, within this framework, there are significant

differences in the basic composition of the assets and the liabilities and how they contribute

towards the revenues and expenses of the bank.

The sources of the funds for the lending and investments activities constitute the Liabilities of

the banks balance sheet. The various sources through which the bank raises funds for its

business are broadly classified into the following:

Figure: Sources of Funds for Commercial Banks

Sourcess

of Funds

Banks

Capital

Deposit

Borrowed

Fund

Non

Deposit

Off

Balance

Sheet

Reserved

Fund
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Figure: Different available sources of fund

Transaction deposits

Demand deposit account (checking)

Negotiable order of withdrawal (NOW) account

1981

Requires larger minimum balance

Savings Deposits

Passbook savings

Regulation Q until 1986

Time Deposits

Certificate of deposit (CD)

No secondary market

Negotiable CD

Short-term, minimum $100,000

Deposit Sources

Current Accounts

Money Market

Account

Savings Accounts

Fixed Deposits

Time Deposit

Call Deposit

Transaction Deposits

Non Deposit

Sources

Certificates of Deposit

Bankers Acceptance

Eurodollar Borrowings

from Own Foreign

Offices

Security RPs

Federal Fund

Borrowings

Commercial PaperIssued

Off Balance Sheet

Sources

Securitizing Bank

Loans and Other

Assets

Sales of Loans to Raise

Funds

Long term Capital

Bond

Convertible Security

Banks Capital

Othters

Retain Earning

Call money Market

Loan from Central

Bank

Foreign Aid

Remittance

Sell of assets

Borrowing from Banks


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Can trade among investors via dealer

Money Market Deposit Accounts (MMDAs)

More liquid than CDs : no specified maturity

Limited check writing

Created in 1982

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 from the Federal Reserve Banks

Borrowing at the discount window

Discount rate

Intended for meeting temporary short-term reserve requirement needs

Must get Fed approval

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

Form of paying interest on large customer checking balances

Eurodollar borrowings

Banks outside the United States make dollar-denominated loans

Eurodollar market is very large

Bonds issued by the bank

Like other businesses, banks issue bonds to finance long-term fixed assets

Usually subordinated to deposits

Part of secondary regulatory capital


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Bank capital

Obtained from issuing stock or retaining earnings

No obligation to pay out funds in the future

Primary vs. secondary

Must be sufficient to absorb operating losses

As of 1992: risk-based capital requirement

Current Accounts

Current account is one of the two components of its balance of payments

Consists of the balance of trade, net factor income and net cash transfers

current account surplus increases a country's net foreign assets

current account deficit decreases a countrys net foreign assets

Fixed Deposit

A financial instrument provided by banks which provides investors with a

higher rate of interest than a regular savings account, until the given maturity date.

It is known as a term deposit or time deposit in Canada, Australia, New

Zealand, and the US, and as a bond in the United Kingdom.

Call Deposit

Offers the advantages of both a savings and a checking account.

Has no fixed deposit period

Provides instant access to funds and allows unlimited withdrawals and

deposits

Certificates of Deposit

A time deposit, a financial product commonly sold in the United States by

banks, thrift institutions, and credit unions

CDs are similar to savings accounts in that they are insured and thus

virtually risk-free


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Bankers Acceptance

A short-term debt instrument issued by a firm that is guaranteed by a

commercial bank

Are issued by firms as part of a commercial transaction

Similar to T-Bills and are frequently used in money market funds

Are traded at a discount from face value on the secondary market, which

can be an advantage because the banker's acceptance does not need to be held until

maturity

Commercial Paper

An unsecured promissory note with a fixed maturity of no more than 270

days

Issued (sold) by large corporations to obtain funds to meet short-term debt

obligations

Backed only by an issuing bank or corporation's promised to pay the face

amount on the maturity date specified on the note

Convertible Security

A security that can be converted into another security

Convertible securities may be convertible bonds or preferred stocks that

pay regular interest and can be converted into shares of common stock

Retained Earnings

Refers to the portion of net income of a corporation that is retained by the

corporation rather than distributed to shareholders as dividends

If the corporation incurs a loss, then that loss reduces the corporation's

retained earnings balance

Retained earnings and losses are cumulative from year to year

Call Money Market

Allows for large financial institutions, such as banks, mutual funds and

corporations to borrow and lend money at interbank rates

Foreign Aid

A voluntary transfer of resources from one country to another


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Remittance

Transfer of money by a foreign worker to an individual in his or her home

country

Money sent home by migrants competes with international aid as some of

the largest financial inflows to developing countries

Sale of Assets

The compensated distribution of valuable property that can be tangible or

intangible

In a typical business or private transaction involving a sale of assets, the

seller gains ownership of some form of cash or its equivalent, while the buyer

obtains ownership of the asset

source of fund(bank's liability)

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