Wednesday, May 20, 2009
Business Lending by banks
why do business firms borrow from commercial banks? A nationwide sample survey conducted by the survey Research center of the University of Michigan shows that business firms mainly borrowed to secure either working capital or funds for capital expenditures. Borrowing for working capital includes such purposes as building up or carrying inventories, seasonal credit, borrowing for financing sales or credit to customer, discounting receivables, and the like. the latter purposes all fall within the traditional doctrines of the proper use of bank credit, whereas the use of bank credit to finance capital expenditures does not.
excess member bank reserves
Total and excess reserves of member banks are affected through open market operations or through changes in reserve requirements. Excess reserves of member banks are equal to total reserves minus required reserves. When the Federal Reserve lowers reserve ratio requirements,or when it provides added bank reserves through open market operations,the immediate effect of these actions is to increase excess reserves of member banks. Ordinarily,it can be assumed that added excess reserves will be quickly put to work earning more profits for the bank in increased loans or increased investments.
But this profit motive to utilize virtually all increases in excess reserves seems to be stronger for large city banks than for smaller banks. Although in recent years all banks have tended to ave small amounts of excess reserves,the tendency of large city banks in New York City and Chicago to approach zero excess reserves .In some months in 1976 these banks even had negative excess reserves,which indicates the extent of their efforts to maximize their profits by tending toward zero excess reserves.
Borrowings in this period were relatively small from the Federal Reserve banks,since this was a period of credit easing and loanable funds were in ready supply. The bulk of member bank reserves were held at the regional Reserve banks.Nevertheless some $7.5-$8.5 billion were held as vault cash in the form Federal Reserve banks in the of currency and coin to satisfy the cash needs of customers.there was some increase in borrowings at the federal Reserve Banks in the last quarter of 1976 and some increase in borrowing at the federal Reserve Banks in the last quarter of 1976 and some increase in holdings of currency and coin.
internal links :
1-BANK RESERVES :
http://thefutureofmoney.blogspot.com/2009/05/bank-reserves.html
2- [[Primary Bank Reserves ]]:
http://thefutureofmoney.blogspot.com/2009/05/primary-bank-reserves.html
But this profit motive to utilize virtually all increases in excess reserves seems to be stronger for large city banks than for smaller banks. Although in recent years all banks have tended to ave small amounts of excess reserves,the tendency of large city banks in New York City and Chicago to approach zero excess reserves .In some months in 1976 these banks even had negative excess reserves,which indicates the extent of their efforts to maximize their profits by tending toward zero excess reserves.
Borrowings in this period were relatively small from the Federal Reserve banks,since this was a period of credit easing and loanable funds were in ready supply. The bulk of member bank reserves were held at the regional Reserve banks.Nevertheless some $7.5-$8.5 billion were held as vault cash in the form Federal Reserve banks in the of currency and coin to satisfy the cash needs of customers.there was some increase in borrowings at the federal Reserve Banks in the last quarter of 1976 and some increase in borrowing at the federal Reserve Banks in the last quarter of 1976 and some increase in holdings of currency and coin.
internal links :
1-BANK RESERVES :
http://thefutureofmoney.blogspot.com/2009/05/bank-reserves.html
2- [[Primary Bank Reserves ]]:
http://thefutureofmoney.blogspot.com/2009/05/primary-bank-reserves.html
Tuesday, May 19, 2009
Primary Bank Reserves
Primary Bank Reserves are simply cash held by the bank, whether in its vaults or in deposits of other banks. The Federal Reserve System, however, does not permit its member banks to include in their legal reserves interbank deposit in other commercial banks, though it does include deposits in regional Reserve Banks. Nevertheless, for many purposes, other than meeting legal reserve requirements, deposits in other banks meet all the requirements of ready cash.
The amount of primary, or cash, reserve available to a given bank depends upon two major factors; (1)deposits flows in or out of the bank, and (2) the prevailing Federal Reserve policy, including changes in such policy. The federal Reserve, of course, has ultimate control over the amount of bank reserves available to the banking system. in addition to the amount of cash reserves available, the primary reserve position of the bank or the entire banking system also depends upon the amounts of reserve that are required. These required reserves depend not only upon the amount of bank deposits but also on their distribution between time and demand deposits. Legal reserve requirements also affect the amount of required reserves.
MEMBER BANK RESERVE REQUIREMENTS in 1935 congress gave the Board of Governors of federal Reserve System the power to impose reserve requirements on both demand and time deposits within a certain range on each set by Congress. At that time legal reserves of member banks were defined as being only deposits in the federal Reserve Banks. In 1959 Congress again amended the basic Federal Reserve Act in order to permit vault cash as well as deposits in federal reserve banks to be included in legal reserves.
LAGGED RESERVE ACCOUNTING The required reserve base for all member banks is computed against average daily deposits for the weekly reserve period, which runs from Thursday to Wednesday inclusive. In 1968 the federal Reserve introduced lagged reserve accounting, so that required reserves for the current reserves week are now based on average deposits in the period two weeks earlier. furthermore, member banks are permitted to carry forward into the next reserve week either excess or deficiencies averaging up to 2 per cent of required reserves.
internal links :
BANK RESERVES
http://thefutureofmoney.blogspot.com/2009/05/bank-reserves.html
The amount of primary, or cash, reserve available to a given bank depends upon two major factors; (1)deposits flows in or out of the bank, and (2) the prevailing Federal Reserve policy, including changes in such policy. The federal Reserve, of course, has ultimate control over the amount of bank reserves available to the banking system. in addition to the amount of cash reserves available, the primary reserve position of the bank or the entire banking system also depends upon the amounts of reserve that are required. These required reserves depend not only upon the amount of bank deposits but also on their distribution between time and demand deposits. Legal reserve requirements also affect the amount of required reserves.
MEMBER BANK RESERVE REQUIREMENTS in 1935 congress gave the Board of Governors of federal Reserve System the power to impose reserve requirements on both demand and time deposits within a certain range on each set by Congress. At that time legal reserves of member banks were defined as being only deposits in the federal Reserve Banks. In 1959 Congress again amended the basic Federal Reserve Act in order to permit vault cash as well as deposits in federal reserve banks to be included in legal reserves.
LAGGED RESERVE ACCOUNTING The required reserve base for all member banks is computed against average daily deposits for the weekly reserve period, which runs from Thursday to Wednesday inclusive. In 1968 the federal Reserve introduced lagged reserve accounting, so that required reserves for the current reserves week are now based on average deposits in the period two weeks earlier. furthermore, member banks are permitted to carry forward into the next reserve week either excess or deficiencies averaging up to 2 per cent of required reserves.
internal links :
BANK RESERVES
http://thefutureofmoney.blogspot.com/2009/05/bank-reserves.html
Sunday, May 17, 2009
BANK RESERVES
BANK RESERVES were originally required by various states before the civil war to provide for convertibility or redeemability of bank notes. following the panic of 1857 and the national bank Act of 1863, a number of regulatory agencies required reserves against both bank notes and bank deposits. These required reserves could be either in the form of lawful money or in correspondent balances in other banks. Some states also permitted banks to include certain securities,such as federal government securities and certain state and local government securities,in their legal reserves.
Regardless of the form of bank reserves,they were invariably regarded as being necessary to maintain bank liquidity. In other words,banks in their search for profits had to be prevented by the regulatory authorities from an over-extension of bank credit,wherein particular banks might be unable to satisfy the claims of their creditors in an emergency period. Today,however,it is recognized that liquidity for the banking system as a whole depends ultimately upon the ability and willingness of the Federal reserve to supply additional funds to the banking system when needed.Reserve requirements now are regarded as a fulcrum,or pressure point,whereby the monetary authorities can make effective their desired monetary-credit policies. However,this fulcrum of legal reserve requirements applies only to a certain amount of the primary,or cash,reserves of a bank.
Regardless of the form of bank reserves,they were invariably regarded as being necessary to maintain bank liquidity. In other words,banks in their search for profits had to be prevented by the regulatory authorities from an over-extension of bank credit,wherein particular banks might be unable to satisfy the claims of their creditors in an emergency period. Today,however,it is recognized that liquidity for the banking system as a whole depends ultimately upon the ability and willingness of the Federal reserve to supply additional funds to the banking system when needed.Reserve requirements now are regarded as a fulcrum,or pressure point,whereby the monetary authorities can make effective their desired monetary-credit policies. However,this fulcrum of legal reserve requirements applies only to a certain amount of the primary,or cash,reserves of a bank.
Saturday, May 16, 2009
bank lending and liquidity
the pattern of bank is lending business, as well as the character of its deposits, also helps determine its needed liquidity ratio. the economic structure of the community in which the bank is located will affect both the seasonal and the cyclical nature of loan demands that converge on the bank in question. the composition and maturity pattern of a banks loan portfolio, as well as the character of its investment portfolio, greatly influence the liquidity needs of a particular bank. a bank that has a loan portfolio with well-spaced maturities of loans, or a bank that has a high proportion of government notes or bonds falling due within a year or two, may feel less need for a high ratio of liquid assets to deposit than another bank that is not so fortunately situated.
Management Attitudes,Certain management attitudes or predilections may also determine the felt liquidity needs of a particular bank. Some bank managements simply have more risk aversion or are more conservative in their attitudes than others. we would expected a more conservative bank management to wish to hold a higher proportion of liquid assets than another bank with a somewhat less conservative management. Also, the attitude of given bank 's management toward borrowing from the regional reserve bank is important. those member banks that are willing to borrow whenever necessary and possible would presumably need a somewhat lower liquidity ratio than banks that borrow seldom, if at all, from the federal reserve.
LARGER AND SMALLER BANKS, The level of primary reserve that is legally required may also help explain certain of the differences between, say, larger and smaller banks. Those larger member banks of the federal reserve System that are city banks have always had higher legal reserve ratios imposed upon them than on those smaller member banks classified as "all other member banks" which were formerly called country banks. Any member bank that has over $400 million in net demand deposits had a legal reserve ratio of 16.25 per cent applied to all of its demand deposits over $400 million in 1977. the downward pressures on bank profits, which these higher reserve requirements imply, may help explain a seemingly greater interest on the part of city banks in investing a higher proportion of the available resources in higher-yielding assets in the maturity and risk area beyond those of the most highly liquid assets. furthermore, such city banks, as we have already indicated, tend to have a low level of excess primary reserves.
Management Attitudes,Certain management attitudes or predilections may also determine the felt liquidity needs of a particular bank. Some bank managements simply have more risk aversion or are more conservative in their attitudes than others. we would expected a more conservative bank management to wish to hold a higher proportion of liquid assets than another bank with a somewhat less conservative management. Also, the attitude of given bank 's management toward borrowing from the regional reserve bank is important. those member banks that are willing to borrow whenever necessary and possible would presumably need a somewhat lower liquidity ratio than banks that borrow seldom, if at all, from the federal reserve.
LARGER AND SMALLER BANKS, The level of primary reserve that is legally required may also help explain certain of the differences between, say, larger and smaller banks. Those larger member banks of the federal reserve System that are city banks have always had higher legal reserve ratios imposed upon them than on those smaller member banks classified as "all other member banks" which were formerly called country banks. Any member bank that has over $400 million in net demand deposits had a legal reserve ratio of 16.25 per cent applied to all of its demand deposits over $400 million in 1977. the downward pressures on bank profits, which these higher reserve requirements imply, may help explain a seemingly greater interest on the part of city banks in investing a higher proportion of the available resources in higher-yielding assets in the maturity and risk area beyond those of the most highly liquid assets. furthermore, such city banks, as we have already indicated, tend to have a low level of excess primary reserves.
Do modern-day checks satisfy the desired properties of money?
obviously checks are easy to carry around (portable), can around (portable), can be written in various amounts (divisible), and are reasonably durable. However, checks are not always of recognizable value. if a stranger offers you a $30,000 check for your car, chances are you will not hand over the keys. the problem is that you do not recognize the true value of the check-it may bounce, in which case you are out one car. Recent advances in electronic check verification,however, are making it easier for some check recipients (primarily businesses) to verify checks quickly.
trading places : Auction and over-the-counter markets
Secondary financial markets also can be categorized according to how assets are traded between buyers and sellers.The first is auction markets,in which prices are set by competitive bidding by a large number of traders acting on behalf of individual buyers or sellers. The most common auction markets are exchanges,or central locations at which buyers and sellers trade. These include the New York and American Stock Exchanges, the Tokyo Stock Exchange,the London stock Exchange,and others.
Secondary markets also can be organized as over-the-counter(OTC)markets,in which there is no centralized place for auction trading.Over-the-counter dealers buy and sell stocks and bonds through computerized trading to anyone willing to accept their posted prices.Close electronic contact keeps the over-the-counter market competitive.You are unlikely to pay a much higher price for a share of stock in Newco at one dealer than at another.
The equities of the largest corporations are traded on exchanges,as are the bonds of the most well-known corporations. The shares of smaller,less well-known firms are generally traded in over-the-counter markets,as are U.S.government bonds.The market for these bonds has the largest trading volume of any debt or equity market.Other major OTC markets include those for foreign exchange,federal funds,and negotiable certificates of deposit.
Secondary markets also can be organized as over-the-counter(OTC)markets,in which there is no centralized place for auction trading.Over-the-counter dealers buy and sell stocks and bonds through computerized trading to anyone willing to accept their posted prices.Close electronic contact keeps the over-the-counter market competitive.You are unlikely to pay a much higher price for a share of stock in Newco at one dealer than at another.
The equities of the largest corporations are traded on exchanges,as are the bonds of the most well-known corporations. The shares of smaller,less well-known firms are generally traded in over-the-counter markets,as are U.S.government bonds.The market for these bonds has the largest trading volume of any debt or equity market.Other major OTC markets include those for foreign exchange,federal funds,and negotiable certificates of deposit.
Friday, May 15, 2009
corporate stock
A share of corporate stock is an equity instrument that represents ownership of a share of the assets and earnings of a corporation.When a corporation like AT&T needs long-term funds,it can sell shares of stock to individuals or other investors. AT&T uses the funds received to purchase assets and run the company;in return,the shareholder owns a share of these assets and the earnings they generate for AT&T.The profits earned by a corporation and paid to shareholders are known as dividends. Unlike interest payments,dividends can vary with the health of the company.
It is important to emphasize that the only time a corporation receives money from stock is the time at which it issues the stock--the primary market transaction. When the company decides to issue stock,it offers the shares to underwriters,investment banks that guarantee the firm a certain price for the issue. Then the investment banker (or bankers,if the issue is large)sells the stock to individual investors,with the assistance of brokers,at what they hope is a higher price than the guaranteed price. Effectively the underwriters provide insurance to the company issuing the new stock and bear the risk associated with the low price investors pay for the stock.
Once a new issue is in the hands of individual investors, the stock can be sold and purchased by another investor(with the aid of a broker)in a to the corporation.Individuals own the majority of stock in the United States,and pension funds,insurance companies,and mutual funds own the remainder.
internal links;-
http://thefutureofmoney.blogspot.com/2009/05/direct-financing.html
It is important to emphasize that the only time a corporation receives money from stock is the time at which it issues the stock--the primary market transaction. When the company decides to issue stock,it offers the shares to underwriters,investment banks that guarantee the firm a certain price for the issue. Then the investment banker (or bankers,if the issue is large)sells the stock to individual investors,with the assistance of brokers,at what they hope is a higher price than the guaranteed price. Effectively the underwriters provide insurance to the company issuing the new stock and bear the risk associated with the low price investors pay for the stock.
Once a new issue is in the hands of individual investors, the stock can be sold and purchased by another investor(with the aid of a broker)in a to the corporation.Individuals own the majority of stock in the United States,and pension funds,insurance companies,and mutual funds own the remainder.
internal links;-
http://thefutureofmoney.blogspot.com/2009/05/direct-financing.html
international financial instruments
Tremendous growth has occurred in international financial instruments in recent years. for the most part, the financial instruments traded in international markets function like the instruments issued in the U.S. the only difference is that the unit of account for these instruments is the local currency of the country in which they are issued. for instance, bonds issued in Britain are denominated in British pounds, while bonds issued in Germany are issued in German marks. Both are foreign bonds to U.S. residents.Eurobonds are an important exception. Eurobonds are bonds denominated in a currency other than that of the country of origin. for example, a bond issued in Germany but denominated (paying interest and its face value) in U.S. dollars is a Eurobond.
The recent surge in activity in world stock and bond markets has broadened the possibilities for investors and borrowers alike. A borrower no longer has to obtain funds from financial intermediaries in his or her own country;similarly, a lender need not to borrowers in its own country.
Because of time differences across the globe (when it is 4 A.M. in New York,it is 9 A.m. in London) international markets allow borrowers and lender to make financial transactions at virtually any time of day. This fact has greatly enhanced the liquidity of financial assets that trade on exchanges around the world.
The recent surge in activity in world stock and bond markets has broadened the possibilities for investors and borrowers alike. A borrower no longer has to obtain funds from financial intermediaries in his or her own country;similarly, a lender need not to borrowers in its own country.
Because of time differences across the globe (when it is 4 A.M. in New York,it is 9 A.m. in London) international markets allow borrowers and lender to make financial transactions at virtually any time of day. This fact has greatly enhanced the liquidity of financial assets that trade on exchanges around the world.
Thursday, May 14, 2009
indirect financing
Indirect financing occurs as a result of financial intermediation.financial institution acting as intermediaries,perform the function of channeling saving funds from household(ultimate lenders)to businesses (ultimate borrowers).For example,commercial banks and other depository institutions accept monetary liabilities,such as demand deposits and savings deposits,and insurance companies accept monetary liabilities,such as payment of premiums that obligate the insurance companies to reimburse expected losses.In turn,financial institution purchase assets (relend the funds). for example, commercial banks purchase IOUs from businesses, and thrift institution purchase mortgages from home buyers (this latter transaction implies a relending back to households).
internal links:
http://thefutureofmoney.blogspot.com/2009/05/direct-financing.html
internal links:
http://thefutureofmoney.blogspot.com/2009/05/direct-financing.html
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