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Understanding U.S. Bank Obligations and Financing Mechanisms

This chapter delves into the key types of U.S. banks, including Money Center and Regional Banks, highlighting their funding strategies through demand deposits and money market instruments. Key features of bank debt instruments such as Certificates of Deposit (CDs) and their various types, including Domestic, Eurodollar, Yankee, and Thrift CDs, are discussed. The significance of the Federal Funds market, its interest rates, and the role of Banker's Acceptance in commercial transactions are also covered, providing a comprehensive overview of how banks raise capital and manage liquidity.

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Understanding U.S. Bank Obligations and Financing Mechanisms

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  1. Chapter 21 – Bank Obligations BA 543 Financial Markets and Institutions

  2. Chapter 21 – Bank Debt • Two Major Types of U.S. Banks • Money Center Banks • Rely on Money Markets to raise funds • Do not generally rely on demand deposits • Regional Banks • Rely on Demand Deposits for funds • Do not generally rely on money market funds • Money Markets • Maturities of less than one year

  3. Chapter 21 – Bank Debt • Certificates of Deposit • Assets sold by the bank to raise funds • Typically in small denominations for customers to have investment options at bank • Maximum face value is • $250,000 standard • $500,000 qualified retirement accounts • Can now be negotiable (sold before maturity) • Large Denomination Negotiable CDs • Can be sold before maturity date • Issued in $1 million or more face value

  4. Chapter 21 – Bank Debt • FOUR types of Issuers (of US Dollar CDs) • Domestic CDs • By U.S. domestic banks in the U.S. • Eurodollar CDs • By U.S. domestic banks but outside the U.S. • Yankee CDs • By foreign banks in the U.S. • Thrift CDs • By S & Lsor Savings Banks in the U.S. • LIBOR (London Interbank offer rate) • Major international bank rate for borrowing from each other • The Eurodollar CD

  5. Chapter 21 – Bank Debt • Federal Funds • Banks must “deposit” a percentage of their deposits with the Federal Reserve Bank • The deposits are known as Federal Funds • Banks do not earn interest on their Federal Funds • Banks can sell their excess reserves • Typically sell excess reserves as Repos • Repos usually one-day maturity (overnight rate) • Federal Funds Rate – Benchmark Rate • Basis for many other rates • Effective Rate is average from N.Y. brokers

  6. Chapter 21 – Bank Debt • Banker’s Acceptance • Designed to foster commercial transactions • Also know as acceptance financing • An Example • U.S. Auto Dealer wants to sell foreign cars • Dealer uses local bank to facilitate purchase of foreign cars • Foreign manufacturer requires backer for cars • Bank holds titles to foreign cars and releases titles at sale of car • Loan is self liquidating as cars are sold

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