Chapter 4. Depository Institutions“Banks”.ppt

Chapter 4. Depository Institutions“Banks” Asset/Liability problem Commercial Banks Savings and Loans Credit Unions I. Asset/Liability Problem Assets how banks USE their funds loans, cash reserves, securities Liabilities how banks GET their funds deposits, borrowing, commercial paper Interest Rate Risk banks tend to borrow short and lend long maturity intermediation banks depend on spread income interest received on assets minus interest paid on deposits changes in interest rates will change profits rising short-term rates reduce the spread income example: 1970 30 yr. loan 9.1%, 6 mo. CD 8% 1981 6 mo. CD 18.27% derivatives help banks manage this risk Liquidity banks must hold some cash, near cash if fall short, must pay to borrow funds or sell assets tradeoffs between liquidity and interest rate earned II. Commercial Banks state or federal charter dual banking system 75% state chartered consolidation 1988: 13,137, 2000: 8,375 all insured by FDIC Regulators Federal Reserve System member banks -- all federal some state banks Comptroller of the Currency federal banks FDIC nonmember state banks state agencies Bank services individual consumer loans, mortgages, credit cards, student loans, accounts institutions commercial lending/leasing pension, cash management global corporate financing currency exchange bank acceptances interest and fee income banks increasingly rely on fee income Balance Sheet (2003) Assets loans (64%) securities (25%) cash (5%) other (6%) Liabilities deposits (65%) other borrowing (28%) -- the Federal Reserve (discount loans) -- other banks (federal funds) -- financial markets (commercial paper) Equity capital (7%) money center banks rely on money market to raise funds regional banks rely on deposits to raise funds Regulation much of it due to Great Depression resulting bank failures some of this has been repealed, but still affects banks today Repealed regulations Regulation Q (1933) interest rate ceilings on bank deposits