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Federal Funds Case Study

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Federal Funds Case Study
5. Federal Funds Federal Funds represent the asset to lending bank and liability to borrowing bank. The loan in Federal funds is short-term loan. Usually, the loans are for one to seven days. These funds help the bank to correct short-tem fund imbalances. Federal funds rate is interest rate charged in the federal funds. It is same for all banks borrowing in federal funds market. Federal funds market more active on Wednesday because that is final day of each particular settlement period for which each bank must maintain a specified volume of reserves required by Fed. 6. Federal Funds Market Banks have to meet reserve requirements. Each Wednesday is the final day of each particular settlement …show more content…
The bank has traditionally focused on CDs 2. It offers checking accounts & money market deposit accounts (MMDAs) but it has not advertised these account: The bank does not have much short-term deposit. They cannot use short-term deposit to meet reserve requirement. 3. It pays about 3% points more on its CDs than on its MMDAs: obtaining CDs costs more than MMDAs, but the bank knows when the deposited fund is withdraw. Use of loans: Bank loans to build shopping malls and apartment complexes. The demand for real estate is low, so the probability of defaulted loan increases. a. Bank should continue to focus on attracting funds by offering CDs, it also push the other types of deposits such as MMDAs. The Bank should make push the MMDAs, because it is cheaper source of fund. Besides MMDAs, and CDs, bank can obtain fund from another source. The main fund sources of banks are deposit account (Transaction deposits, Saving deposit, time deposits, MMDAc), borrowed funds (Federal funds purchased, borrowing from the federal reserve banks, Repurchase agreements, Eurodollar borrowing) Long-term sources of funds (Bonds, bank …show more content…
Bank should not focus on real estate loans because it put bank in the riskier position. The real estate market is going down, so the probability of defaulted real estate loan will increase. The bank should diversify their using of fund to reduce the risk. The bank can make loan to small business or different industry firms to diversify its borrowers. The common uses of funds by banks can be: * Reserving as Cash, bank holds cash to meet the reserve requirement. * Loaning, the loan is tailored to the borrower’s need. * Investing in securities, which enable cash out the securities whenever they
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