Federal Funds, a Short Term Loan

Topics: Federal Reserve System, Monetary policy, Loan Pages: 3 (703 words) Published: August 22, 2011
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 period for which each bank must maintain a specified volume of reserves required by the Fed. When the bank does not meet the requirement, they have to borrow before settlement period ends. They can borrow in federal funds market.

7. Borrowing from Federal Reserve
Rate is charged is primary credit lending rate. It is set at a level above the federal funds rate at any point in time, so bank will only borrow from Federal Reserve as last resort
10. Use of Funds
Banks invest in securities because of the liquidity of securities. They can convert securities immediately Moreover, Investing in securities is easier.

Managing in Financial Markets
Summary and analyze
1. 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....
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