Chapter 21 – Bank Obligations BA 543 Financial Markets and Institutions

Chapter 21 – Bank Debt Two Major Types of U.S. Banks Money Center Banks Rely on Money Markets to raise funds Do not generally rely on demand deposits Regional Banks Rely on Demand Deposits for funds Do not generally rely on money market funds Money Markets Maturities of less than one year

Chapter 21 – Bank Debt Certificates of Deposit Assets sold by the bank to raise funds Typically in small denominations for customers to have investment options at bank Maximum face value is $250,000 standard $500,000 qualified retirement accounts Can now be negotiable (sold before maturity) Large Denomination Negotiable CDs Can be sold before maturity date Issued in $1 million or more face value

Chapter 21 – Bank Debt FOUR types of Issuers (of US Dollar CDs) Domestic CDs By U.S. domestic banks in the U.S. Eurodollar CDs By U.S. domestic banks but outside the U.S. Yankee CDs By foreign banks in the U.S. Thrift CDs By S & Ls or Savings Banks in the U.S. LIBOR (London Interbank offer rate) Major international bank rate for borrowing from each other The Eurodollar CD

Chapter 21 – Bank Debt Federal Funds Banks must “deposit” a percentage of their deposits with the Federal Reserve Bank The deposits are known as Federal Funds Banks do not earn interest on their Federal Funds Banks can sell their excess reserves Typically sell excess reserves as Repos Repos usually one-day maturity (overnight rate) Federal Funds Rate – Benchmark Rate Basis for many other rates Effective Rate is average from N.Y. brokers

Chapter 21 – Bank Debt Banker’s Acceptance Designed to foster commercial transactions Also know as acceptance financing An Example U.S. Auto Dealer wants to sell foreign cars Dealer uses local bank to facilitate purchase of foreign cars Foreign manufacturer requires backer for cars Bank holds titles to foreign cars and releases titles at sale of car Loan is self liquidating as cars are sold