Friday, May 1, 2009

Commercial banks and the Money Market (1)

Although the money has a number of important participants, commercial banks play a particularly significant role,which should be carefully examined.Furthermore,it is largely through its varying impact upon commercial bank reserve positions that the federal reserve is able to affect the cost and availability of funds in the money and capital markets and thus to influence aggregate economic activity. The relationships of commercial banks to this short-term debt market are therefore of special significance.
Since banks are now concerned with bot asset and liability management,they may approach the impersonal money market for either of these purposes,particularly if they are large banks. Liability management for large commercial banks requires interaction with the money market,since an important tool of such liability management is,as has been noted,the issuance of large certificates of deposit in denominations of $100,000 or more. These CD's, in turn, are an important money market asset.
If these commercial banks wish more funds,say,to expand their business lending,then they can"buy"such funds by offering a higher interest rate on such marketable deposits. Smaller commercial banks may also wish to be more aggressive in attracting additional deposits in periods of rising loan demand. However,the smaller banks are usually restricted to offering "consumer-type"certificates of deposits in much smaller dollar amounts than are traded in the money market.

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