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L6. The Investment Functions in Financial – Services Management & …

- - - - Stabilize the Bank’s Income
      - Offset Credit Risk Exposure
      - Provide Geographic Diversification
      - Provide Backup Source of Liquidity
      - Reduce Tax Exposure
      - Serve as Collateral
      - Hedge Against Interest Rate Risk
      - Provide Flexibility
      - Dress Up a Bank’s Balance Sheet
  - - - • Treasury Bills
      - • Short-Term Treasury Notes and Bonds
      - • Federal Agency Securities
      - • Certificates of Deposit
      - • Eurocurrency Deposits
      - • Banker’s Acceptances
      - • Commercial Paper
      - • Short-Term Municipal Obligations
  - - - Treasury Notes and Bonds Over One Year to Maturity
      - • Municipal Notes and Bonds
      - • Corporate Notes and Bonds
      - • Asset Backed Securities
  - - - Expected Rate of Return
      - • Tax Exposure
      - • Liquidity Risk
      - • Call Risk
      - • Prepayment Risk
      - • Interest Rate Risk
      - • Credit Risk
      - • Business Risk
      - • Inflation Risk
      - • Pledging Requirements
- - - - L = Supplies of Liquid Funds - Demands for Liquidity
    - - Incoming customer deposits
        
        • Revenues from the sale of nondeposit services
        
        • Customer loan repayments
        
        • Sales of bank assets
        
        • Borrowings from the money market
    - - Customer deposit withdrawals
        
        • Credit requests from quality loan customers
        
        • Repayment of nondeposit borrowings
        
        • Operating expenses and taxes
        
        • Payment of stockholder dividends
  - - - Imbalances between maturity dates of their assets and liabilities
      - • High proportion of liabilities subject to immediate repmt
      - • Sensitivity to changes in interest rates
      - • Confidence in the U.S. payment system
  - - - Asset liquidity management, or asset conversion,
        
        Liquid assets are an
        alternative source of funds
        
        Characteristics of liquid
        assets
        
        A reserve to protect the bank from financial market loss of confidence that could threaten safety and soundness
        
        Primary reserve
        
        Secondary reserve
      - • Borrowed liquidity or liability management strategy
        
        Federal funds purchased
        
        • Selling securities for repurchase (repos)
        
        • Issuing large CDs (greater than $100,000)
        
        Eurocurrency borrowings
        
        • Securing advance from the Federal Home Loan Banks
        
        • Borrowing reserves from the discount window of the Federal Reserve
      - • Balanced liquidity strategy
        
        Liquidity indicator approach
        
        Cash position indicator
        
        • Liquid security indicator
        
        • Net federal funds postion
        
        • Hot money ratio
        
        • Deposit brokerage index
        
        • Capacity ratio
        
        • Pledged securities ratio
        
        • Core deposit ratio
        
        • Deposit composition ratio
        
        • Loan commitment ratio