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Commercial Banks (Uses of Funds by Banks (Bank loans (Types of business…

- - - - Working capital loan
      - Direct lease loans
      - Informal line of credit
      - Term loans
      - Revolving credit loan
    - - One of the banks serves as the lead bank
      - Other banks supply funds that are channeled to
        the borrower by the lead bank
    - - Firms request LBO financing because they
        perceive that the market value of certain
        publicly held shares is too low.
      - A management group or a business relies mostly
        on debt to purchase the equity of another business.
    - - Installment loans
      - Banks also provide credit cards to consumers who qualify
      - Assessing the applicant’s creditworthiness is much easier for consumer loans than for corporate loans
    - - The loan is backed by the residence purchased.
      - Commercial banks also provide commercial real estate loans
  - - - Corporate and Municipal Bonds
      - Mortgage-backed securities (MBS)
- - - - cannot be withdrawn until a specified maturity date.
      - Certificates of Deposit
        
        No secondary market for retail CDs
        
        Cannot withdraw until the specified maturity
        forgo a portion of the interest
        
        The interest rate and maturity types vary among banks
        
        Require a specified minimum amount of funds to
        be deposited for a specified period of time
        
        Recently, callable CDs are issued
    - - More liquid and have lower interest rate than retail CD
      - provide limited check-writing ability
    - - Passbook savings account
        
        Does not permit check writing
        
        Have no required minimum balance
    - - Demand deposit account
        
        Offered to customers
        
        Require small minimum balance and pays no interest
      - Negotiable order of withdrawal
        
        Requiring a larger minimum balance
        
        Paying interest and providing checking services
  - - - allows depository institutions to accommodate the short-term
      - Represent a liability to the borrowing bank and an asset to the lending bank
      - Used to correct short-term fund imbalances
      - Loans in the federal funds market are typically for
        one to seven days, can be rolled over.
      - The interest rate charged is called the federal funds rate
      - The federal funds market is typically most active on Wednesday
    - - borrowing at the discount window
      - The interest rate charged on these loans is known as the primary credit lending rate
      - Loans from the Fed are short term, commonly from one day to a few weeks.
      - Loans are mainly used to resolve a temporary shortage of funds
      - Banks must first obtain the Fed’s approval
      - The Fed may veto (refuse) continuous borrowing by a bank
    - - A repo represents the sale of securities
      - Banks often use a repo as source of funds
      - The securities serve as collateral in the repo transaction.
      - Repurchase agreement transactions occur through a telecommunications
      - The yield on repurchase agreements is slightly
        less than the federal funds rate at any given time.
    - - The Eurodollar market is very active
      - Some foreign banks accept large short-term
        deposits and make short-term loans in dollars
  - - - Banks own some fixed assets
      - Common purchasers of these bonds are
        households and various F.I
    - - Represent funds acquired by the issuance
        of stock or the retention of earnings
      - Capital can be classified as primary or secondary
      - The bank has no obligation to pay out funds
        in the future
      - A bank’s capital must be sufficient to absorb operating losses
      - Bank regulators are concerned that banks might
        maintain a lower level of capital than they should
    - - Smaller banks rely more heavily on saving
        deposits than do larger banks.
      - Larger banks rely more on short-term borrowings
        than do smaller banks
      - The distribution of bank sources of funds is influenced by bank size
- - - - Taking the surplus funds in the economy
    - - Carrying out payments for goods and services
    - - Handle cash collections and disbursements
    - - Providing principal source of credit for households
    - - Selling insurance and providing financial advice to their customers
    - - Offering their customers the opportunity to buy individual stocks, bonds...
    - - Standing behind their customers to pay off customer debts
    - - financing acquisitions of other companies, dealing in a customer’s securities, providing strategic marketing advice, and offering hedging services