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3. Uses of Funds
by Banks - Coggle Diagram
3. Uses of Funds
by Banks
3.1 Cash
Bank
- Hold some cash as reserves => meet the reserve requirements enforced (Central Bank) + maintain some liquidity and accommodate any withdrawal (depositors)
- Hold only as much as is necessary to maintain a sufficient degree of liquidity (not earn income from cash)
- Tap various sources for temporary funds => not overly concerned with maintaining excess reserves.
- Hold cash in their vaults and at the Central Bank.
3.2 Bank Loans
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Loan
Participations
One of the banks <=> lead bank (arranging for the documentation, disbursement, and payment structure of the loan)
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Some large corporations - borrow a larger amount of funds
=> Several banks pool their available funds in loan participation.
Types of
Consumer Loans
Banks also provide credit cards to consumers who qualify =>Purchase various goods without having a reapply for credit on each purchase.
- Assessing the applicant’s creditworthiness is much easier for consumer loans than for corporate loans.
- An individual’s cash flows is typically simpler and more predictable than a firm’s cash flow.
- The average loan amount to an individual is relatively small, warranting a less detailed credit analysis.
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Types of
business loans
- Term loans: primarily used to finance the purchase of fixed assets
- Direct lease loans (alternative to term loans): the bank may purchase the assets and lease them to the firm in need.
- Working capital loan (self-liquidating loan): designed to support ongoing business operations, typically short term, occur on a frequent basis.
- Informal line of credit – allows the business to borrow up to a specified amount within a specified period of time.
- Revolving credit loan: obligates the bank to offer up to some specified maximum amount of funds over a specified period of time (typically less than 5 years)
Real Estate Loans:
- Residential real estate loans: the maturity (15 to 30 years), although shorter-term mortgages with a balloon payment are also common.
- The loan is backed by the residence purchased.
- Commercial banks also provide commercial real estate loans
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3.4 Others use
Fixed Assets:
Banks must maintain some amount of fixed assets (office, land,...)
=> They can conduct their business operations
Repurchase
Agreement
Banks can act as the lender (on a repo) by purchasing a corporation’s holdings of Treasury securities and then selling them back at the later date.
Provides short-term funds to the corporation, and the bank’s loan is backed by these securities.
Interbank
funds sold
Some banks often lend funds to other banks => The funds sold will be returned with interest at the time specified in the loan agreement.
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