Funding the Bank and Managing Liquidity - Userpage：銀行資金和管理流動(dòng)性的用戶頁

1、Funding the Bank and Managing LiquidityChapter 8Prof. Dr. Rainer StachuletzBanking Academy of Vietnam Based upon: Bank Management, 6th edition.Timothy W. Koch and S. Scott MacDonaldProf. Dr. Rainer Stachuletz Banking Academy of Vietnam - HanoiThe Relationship Between Liquidity Requirements, Cash, an

2、d Funding SourcesThe amount of cash that a bank holds is influenced by the banks liquidity requirementsThe size and volatility of cash requirements affect the liquidity position of the bankDeposits, withdrawals, loan disbursements, and loan payments affect the banks cash balance and liquidity positi

3、onEffect of Maturing Certificates of Deposit and Loan Use on a Banks Deposit Balances at theFederal ReserveRecent Trends in Bank Funding SourcesBank customers have become more rate consciousMany customers have demonstrated a a strong preference for shorter-term depositsCore deposits are viewed as in

4、creasingly valuableBank often issue hybrid CDs to appeal to rate sensitive depositorsTypes of Hybrid CDsJump Rate (Bump-up) CDsCustomers have the option (right) to request a change in rate one time prior to maturity.Indexed CDCD rates float with some base rate (index) such that the yield changes as

5、the index changesCD SpecialCDs with unusual maturities (13 months or 23 months) in which the bank pays an above market rate. At maturity the CD converts to a traditional 12 month or 2-year CD. Recent Trends in Bank Funding SourcesRetail FundingDeposit AccountsTransaction accountsMoney market deposit

6、 accountsSavings accountsSmall time depositsBorrowed FundingFederal Funds purchasedRepurchase agreementsFederal Home Loan Bank borrowingsRecent Trends in Bank Funding SourcesWholesale FundingIncludes borrowed funds plus large CDsEquity FundingCommon stockPreferred stockRetained earningsRecent Trends

7、 in Bank Funding SourcesVolatile LiabilitiesFunds purchased from rate-sensitive investorsFederal Funds purchasedRepurchase agreementsJumbo CDsEurodollar time depositsForeign DepositsInvestors will move their funds if other institutions are paying higher ratesChange in Total Deposits, Borrowed Funds,

8、 Subordinated Notes, and Total Equity Over Time, 19352004Change in the Percentage Contribution of Various Bank Funding Components, 19922004The Percentage Contribution of Various Sources of Bank Funds by Bank Size, 2004Average Annual Interest Cost of Liabilities by Bank Size, 2004Characteristics of R

9、etail-Type DepositsRetail DepositsSmall denomination (under $100,000) liabilitiesNormally held by individual investorsNot actively traded in the secondary marketTransaction AccountsMost banks offer three different transaction accountsDemand DepositsDDAsNegotiable Order of Withdrawal NOWsAutomatic Tr

10、ansfers from SavingsATSTransaction AccountsDemand DepositsChecking accounts that do not pay interestHeld by individuals, business, and governmental unitsMost are held by businesses since Regulation Q prohibits banks from paying explicit interest on for-profit corporate checking accountsTransaction A

11、ccountsNOW AccountsChecking accounts that pay interestATS AccountsCustomer has both a DDA and savings accountThe bank transfers enough from savings to DDA each day to force a zero balance in the DDA accountFor-profit corporations are prohibited from owning NOW and ATS accountsTransaction AccountsAlt

12、hough the interest cost of transaction accounts is very low, the non-interest costs can be quite highGenerally, low balance checking accounts are not profitable for banks due to the high cost of processing checksNon-Transaction AccountsNon-transaction accounts are interest-bearing with limited or no

13、 check-writing privilegesMoney Market Deposit AccountsPay interest but holders are limited to 6 transactions per month, of which only three can be checksAttractive to banks because they are not required to hold reserves against MMDAsNon-Transaction AccountsSavings AccountsHave no fixed maturitySmall

14、 Time Deposits (Retail CDs)Have a specified maturity ranging from 7 days on upLarge Time Deposits (Jumbo CDs)Negotiable CDs of $100,000 or moreTypically can be traded in the secondary marketEstimating the Cost of Deposit AccountsInterest CostsLegal Reserve RequirementsCheck Processing CostsAccount C

15、hargesNSF feesMonthly feesPer check feesEstimating the Cost of Deposit AccountsTransaction Account Cost AnalysisClassifies check-processing as:DepositsElectronicNon-ElectronicWithdrawalsElectronicNon-ElectronicEstimating the Cost of Deposit AccountsTransaction Account Cost AnalysisClassifies check-p

16、rocessing as:Transit ChecksDepositedCashedAccount Opened or ClosedOn-Us checks cashedGeneral account maintenanceTruncatedNon-TruncatedEstimating the Cost of Deposit AccountsTransaction Account Cost AnalysisElectronic TransactionsConducted through automatic deposits, Internet, and telephone bill paym

17、entNon-Electronic TransactionsConducted in person or by mailTransit ChecksChecks drawn on any bank other than the bank it was deposited intoEstimating the Cost of Deposit AccountsTransaction Account Cost AnalysisOn-Us Checks CashedChecks drawn on the banks own customers accountsDepositsChecks or cur

18、rency directly deposited in the customers account Account MaintenanceGeneral record maintenance and preparing & mailing a periodic statement Estimating the Cost of Deposit AccountsTransaction Account Cost AnalysisTruncated AccountA checking account in which the physical check is truncated at the ban

19、k and the checks are not returned to the customerOfficial Check IssuedA check for certified funds. Net Indirect CostsThose costs not directly related to the product such as management salaries or general overhead costsCost and Revenue Accounting Data for Deposit Accounts at FirstBankCalculating the

20、Average Net Cost of Deposit AccountsAverage Historical Cost of FundsMeasure of average unit borrowing costs for existing fundsAverage Interest CostCalculated by dividing total interest expense by the average dollar amount of liabilities outstandingCalculating the Average Net Cost of Deposit Accounts

21、Example:A demand deposit account that does not pay interest has $20.69 in transaction costs charges, $7.75 in fees, an average balance of $5,515, and 5% float would have a net cost of 3.29%Calculating the Average Net Cost of Deposit AccountsCharacteristics of Large Wholesale LiabilitiesWholesale Lia

22、bilitiesCustomers move these investments on the basis of small rate differentials, so these funds are labeled:Hot MoneyVolatile LiabilitiesShort-Term Non-Core fundingCharacteristics of Large Wholesale LiabilitiesWholesale LiabilitiesIncludes:Jumbo CDsFederal Funds PurchasedRepurchase AgreementsEurod

23、ollar Time DepositsForeign DepositsCharacteristics of Large Wholesale LiabilitiesJumbo CDs$100,000 or moreNegotiableCan be traded on the secondary marketMinimum maturity of 7 daysInterest rates quoted on a 360-day year basisInsured up to $100,000 per investor per institutionIssued directly or indire

24、ctly through a dealer or broker (Brokered Deposits)Characteristics of Large Wholesale LiabilitiesJumbo CDsFixed-RateVariable-RateJump Rate (Bump-up) CDDepositor has a one-time option until maturity to change the rate to the prevailing market rateCallableZero CouponStock Market IndexedRate tied to st

25、ock market index performanceCharacteristics of Large Wholesale LiabilitiesIndividual Retirement AccountsEach year, a wage earner can make a tax-deferred investment up to $3,000 of earned incomeFunds withdrawn before age 59 are subject to a 10% IRS penaltyThis makes IRAs an attractive source of long-

26、term funding for banksCharacteristics of Large Wholesale LiabilitiesForeign Office DepositsEurocurrencyFinancial claim denominated in a currency other than that of the country where the issuing bank is locatedEurodollarDollar-denominated financial claim at a bank outside the U.S. The Origin and Expa

27、nsion of Eurodollar Deposits Characteristics of Large Wholesale LiabilitiesFederal Funds PurchasedThe term Fed Funds is often used to refer to excess reserve balances traded between banksThis is grossly inaccurate, given reserves averaging as a method of computing reserves, different non-bank player

28、s in the market, and the motivation behind many tradesMost transactions are overnight loans, although maturities are negotiated and can extend up to several weeksInterest rates are negotiated between trading partners and are quoted on a 360-day basisCharacteristics of Large Wholesale LiabilitiesRepu

29、rchase Agreements (RPs or Repos)Short-term loans secured by government securities that are settled in immediately available fundsIdentical to Fed Funds except they are collateralizedTechnically, the RPs entail the sale of securities with a simultaneous agreement to buy them back later at a fixed pri

30、ce plus accrued interestCharacteristics of Large Wholesale LiabilitiesRepurchase Agreements (RPs or Repos)Most transactions are overnightIn most cases, the market value of the collateral is set above the loan amount when the contract is negotiated. This difference is labeled the marginThe lenders tr

31、ansaction is referred to as a Reverse RepoCharacteristics of Large Wholesale LiabilitiesBorrowing from the Federal ReserveDiscount WindowDiscount RatePolicy is to set discount rate 1% (1.5%) over the Fed Funds target for primary (secondary) credit loansTo borrow from the Federal Reserve, banks must

32、apply and provide acceptable collateral before the loan is grantedEligible collateral includes U.S. government securities, bankers acceptances, and qualifying short-term commercial or government paperCharacteristics of Large Wholesale LiabilitiesBorrowing from the Federal ReservePrimary CreditAvaila

33、ble to generally sound depository institutions on a very short-term basis, typically overnightIt serves as a backup source of short-term funds for sound depository institutionsSecondary CreditAvailable to depository institutions that are not eligible for primary creditCharacteristics of Large Wholes

34、ale LiabilitiesBorrowing from the Federal ReserveSeasonal CreditDesigned to assist small depository institutions in managing significant seasonal swings in their loans and depositsEmergency CreditMay be authorized in unusual and exigent circumstances by the Board of Governors to individuals, partner

35、ships, and corporations that are not depository institutionsCharacteristics of Large Wholesale LiabilitiesFederal Home Loan Bank AdvancesThe FHLB system is a government-sponsored enterprise created to assist in home buyingThe FHLB system is one of the largest U.S. financial institutions, rated AAA b

36、ecause of the government sponsorshipAny bank can become a member of the FHLB system by buying FHLB stockIf it has the available collateral, primarily real estate related loans, it can borrow from the FHLBFHLB advances have maturities from 1 day to as long as 20 yearsCommercial Banks with FHLB Advanc

37、es, 19912004Electronic MoneyIntelligent CardContains a microchip with the ability to store and secure informationMemory CardSimply store informationDebit CardOnlinePIN basedTransaction goes through the ATM systemOfflineSignature based transactionsTransaction goes through the credit card systemDistri

38、bution of the Number of Noncash Payments in 2000 and 200320002003Source: The 2004 Federal Reserve Payments Study, . Note: Online debit payments are PIN-based, which includes purchases at the point of sale with ATM cards, and offline debit payments, which are signature-based transactions. EBTs are el

39、ectronic benefits transfers. Data does not include Fedwire or CHIPS wire transfers.Check 21Check Clearing for the 21st Century Act Facilitates check truncation by reducing some of the legal impedimentsFoster innovation in the payments and check collection system without mandating receipt of check in

40、 electronic formImprove the overall efficiency of the nations payment system Check 21Check TruncationConversion of a paper check into an electronic debit or image of the check by a third party in the payment system other than the paying bankFacilitates check truncation by creating a new negotiable i

41、nstrument called a substitute checkCheck 21Substitute CheckThe legal equivalent of the original check and includes all the information contained on the originalCheck 21 does NOT require banks to accept checks in electronic form nor does it require banks to create substitute checksIt does allow banks

42、 to handle checks electronically instead of physically moving paper checksSubstitute Check Authorized by Check 21The Check Clearing ProcessCheck Clearing ProcessBanks typically place a hold on a check until it verifies that the check is “goodExpedited Funds Availability ActUnder Reg CC, it states th

43、at:Local check must clear in no more than two business daysNon-local checks must clear in no more than five business daysGovernment, certified, and cashiers checks must be available by 9 a.m. the next business dayMeasuring the Cost of FundsAverage Historical Cost of FundsMany banks incorrectly use t

44、he average historical costs in their pricing decisionsThe primary problem with historical costs is that they provide no information as to whether future interest costs will rise or fall.Pricing decisions should be based on marginal costs compared with marginal revenues Measuring the Cost of FundsMar

45、ginal Cost of FundsMarginal Cost of DebtMeasure of the borrowing cost paid to acquire one additional unit of investable fundsMarginal Cost of EquityMeasure of the minimum acceptable rate of return required by shareholdersMarginal Cost of FundsThe marginal costs of debt and equityMeasuring the Cost o

46、f FundsCosts of Independent Sources of FundsIt is difficult to measure marginal costs preciselyManagement must include both the interest and noninterest costs it expects to pay and identify which portion of the acquired funds can be invested in earning assets. Marginal costs may be defined as :Measu

47、ring the Cost of FundsCosts of Independent Sources of FundsAll elements in the numerator are expected costsMeasuring the Cost of FundsCosts of Independent Sources of FundsExample:Market interest rate is 2.5%Servicing costs are 4.1% of balancesAcquisition costs are 1.0% of balancesDeposit insurance c

48、osts are 0.25% of balancesNet investable balance is 85% of the balance (10% required reserves and 5% float)Measuring the Cost of FundsCost of DebtEquals the effective cost of borrowing from each source, including interest expense and transactions costsThis cost is the discount rate, which equates th

49、e present value of expected interest and principal payments with the net proceeds to the bank from the issueMeasuring the Cost of FundsCost of DebtExample:Assume the bank will issue:$10 million in par value subordinated notes paying $700,000 in annual interest and a 7-year maturity. It must pay $100

50、,000 in flotation costs to an underwriter. The effective cost of borrowing (kd) is 7.19%:Measuring the Cost of FundsCost of EquityThe marginal cost of equity equals the required return to shareholdersIt is not directly measurable because dividend payments are not mandatory. Several methods are commo

51、nly used to approximate this required return:Dividend Valuation ModelCapital Asset Pricing Model (CAPM)Target Return on Equity ModelCost of Debt + Risk PremiumMeasuring the Cost of FundsPreferred StockPreferred stock acts as a hybrid of debt and common equityClaims are superior to those of common st

52、ockholders but subordinated to those of debt holdersPreferred stock pays dividends that may be deferred when management determines that earnings are too low. The marginal cost of preferred stock can be approximated in the same manner as the Dividend Valuation Model however, dividend growth is zeroMe

53、asuring the Cost of FundsTrust Preferred StockTrust preferred stock is attractive because it effectively pays dividends that are tax deductibleTo issue the securities, a bank or bank holding company establishes a trust company.The trust company sells preferred stock to investors and loans the procee

54、ds of the issue to the bankInterest on the loan equals dividends paid on the preferred stockThis loan interest is tax deductible such that the bank effectively gets to deduct dividend payments as the preferred stockMeasuring the Cost of FundsWeighted Marginal Cost of Total FundsThis is the best cost

55、 measure for asset-pricing purposesIt recognizes both explicit and implicit costs associated with any single source of funds It assumes that all assets are financed from a pool of funds and that specific sources of funds are not tied directly to specific uses of fundsMeasuring the Cost of FundsWeigh

56、ted Marginal Cost of Total FundsSteps to compute WMCForecast the desired dollar amount of financing to be obtained from each individual debt and equity sourceEstimate the marginal cost of each independent source of fundsCombine the individual estimates to project the weighted costs, which equals the

57、 sum of the weighted component costs across all sourcesMeasuring the Cost of FundsWeighted Marginal Cost of Total FundsSteps to compute WMCManagement should combine the individual estimates to project the weighted cost, where wj equals each sources weight and kj equals the single-source j component

58、cost of financing such that:Measuring the Cost of FundsExampleFunding Sources and Banking RisksBanks face two fundamental problems in managing liabilities. Uncertainty over:What rates they must pay to retain and attract fundsThe likelihood that customers will withdraw their money regardless of rates

59、Funding Sources: Liquidity RiskThe liquidity risk associated with a banks deposit base is a function of:The competitive environmentNumber of depositorsAverage size of accountsLocation of the depositorSpecific maturity and rate characteristics of each accountFunding Sources: Liquidity RiskInterest El

60、asticityHow much can market interest rates change before the bank experiences deposit outflows?If a bank raises its rates, how many new funds will it attract?Depositors often compare rates and move their funds between investment vehicles to earn the highest yields It is important to note the liquidi