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.

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

• 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)

One of the banks <=> lead bank (arranging for the documentation, disbursement, and payment structure of the loan)

Other banks supply funds that are channeled to the borrower by the lead bank

Some large corporations - borrow a larger amount of funds
=> Several banks pool their available funds in loan participation.

A management group or a business relies mostly on debt to purchase the equity of another business.

Firms request LBO financing <=> they perceive that the market value of certain publicly held shares is too low

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.

Installment loans – provided for individuals to finance purchases

Banks purchase Treasury securities as well as securities issued by agencies of the government.

Corporate bonds are subject to credit risk, they offer a higher return than Treasury or government agency securities

Municipal bonds exhibit some degree of risk but can also provide an attractive after-tax return to banks.

Banks also commonly purchase MBS which represent packages of mortgages.

Some banks often lend funds to other banks => The funds sold will be returned with interest at the time specified in the loan 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.

Banks must maintain some amount of fixed assets (office, land,...)
=> They can conduct their business operations

The distribution of bank uses of funds indicates how commercial banks operate

Smaller banks tend to have a relatively large amount of household loan and government securities