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Non-deposit sources of Bank



Category: Concept of the Bank and the Banking System

In the world of banking practice, extensive development of receiving non-deposit sources of resource mobilization. The most common forms of such engagement means include:

— Borrowing on the interbank market;

— An agreement to sell securities and repurchase (or operation «repo»);

— Consideration of bills and receipt of loans from central banks;

— Sale of bankers’ acceptances;

— Issue of commercial paper;

— Borrowing Eurodollar market;

— Issue of capital notes and bonds.

The main purpose of these operations is to improve the liquidity position of the bank.

Borrowing in the interbank market. In banking practice, the U.S., this market is known as the Federal Reserve. These funds represent the deposit funds of commercial banks that are stored in the reserve account at the central bank or federal reserve banks. Commercial banks with the reserve account surplus compared with a mandatory minimum, provide them on loan for a short time. This allows them to get extra profit and the bank-borrower to improve liquidity.

60-s purchase of federal funds used mainly to fund the reserve account of the bank, as interest rates on them were below the discount rate the central bank. In subsequent years, interest rates rose and began to exceed the discount rate.

Federal Reserve System (FRS). Most of the operations of federal funds is a very short time — one business day. However, part of the deal is for a longer period of 30 to 90 days and are called fixed-term deals. Since the purchase of federal funds is not required reserve funds, banks may pay a higher percentage than certificates of deposit.

The UK market for interbank loans received extensive development since 1971, when sharply increased reserve requirements.

Agreement to purchase securities and repurchase («repo») is a type of short-term loan secured by securities (usually T-Bills), when the right of disposal shall be transferred to the lender. Sine qua non of this transaction is the borrower’s obligation to redeem the securities on the agreed date and at a predetermined price. In this case, securities, acting as security, are estimated to deposit margin of 1 to 3% of the market price.

Discounting bills and obtaining loans from the central bank. This way of attracting additional resources are used most often by commercial banks experiencing a seasonal resource, or when they have an emergency. The central bank, it should be that its loans do not become a permanent source of funds. Upon receipt of such loans, commercial banks provide collateral in the form of various Treasury securities, obligations of federal and local authorities, short-term commercial paper.

Accounting for bankers’ acceptances. Banker’s acceptance — this time draft or bill of exchange, exhibited the exporter or importer to the bank, has agreed to accept. Bankers’ acceptances are used to finance foreign trade deals. Commercial bank can discount the Fed acceptances and thus obtain a loan for them. Deemed acceptable for rediscount acceptances up to 6 months of export-import transactions or trade transactions within the country.

Loans to Eurodollar market — a way to leverage resources available to large commercial banks as having or not having overseas branches. Eurodollars — it deposits denominated in U.S. dollars, but owned by banks or other holders located outside the United States, including branches of American banks. Large U.S. banks use the market for euro/dollar deposits for loans typically in times of difficulties on the domestic market. The main market for Eurodollars based in London.

Commercial banks to increase their own capital and, consequently, of banking resources may issue capital notes and bonds. Notes and bonds are issued mainly large banks. The launch of these types of bank debt increases, on the one hand, the bank’s capital, on the other — its resources.


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