Question

● The core of banking functions and success is their sources of funds. Describe in detail the various sources of bank funds (money), how they acquire these funds and who provides the funds. Similarly discuss the alternative sources of funds if a bank finds itself short of cash. Lastly, discuss why a bank might issue a bond.

● By most standards, Money Market accounts are a newer funding source for banks versus traditional savings and checking accounts. Discuss how Money Market accounts are different.

Answer 1

1) The sources of bank funds are:

• Bank's own fund: These are paid up capital, reserve fund and profits. Paid up capital are fund raised by banks via issuing shares which are fully paid up. Reserve fund are those fund that are requires to be maintained by commercial banks which are not distributed as profits. Profits are the income of banks after deducting necessary expenses and taxes and which are not distributed as dividends.
• Borrowed funds are those funds that are borrowed form the Central bank at a specified interest rate. Other sources can be bonds, debentures, certificate of deposits etc.
• Deposits such as current, savings and time deposits are a major source of funds of banks.

Interbank lending is an important alternative sources of funds available if banks fall short of cash. Interbank lending is made by one bank to another bank on the overnight basis at a variable interest rate. This solves the problem of shortfall of cash itself with the banks. Another source of financing if interbank lending is not available, is to seek short term loan from the Federal Bank at specified purchase rate. Lastly, bank can also covert money marketable intstruments such as T bills into cash to resolve the problem of cash.

Banks might issue bonds as bonds help in attracting a large number of lenders in one go and it also doesn't effect the ownership over banks. Bond holders are paid the fixed interest untill the maturity of the bonds.

2) Money Market accounts are a facility available with banks over traditional savings accounts. Money market accounts give high interest over traditional accounts to money market account holders. You can withdraw the funds any time form money market accounts and it works similar to saving accounts. The interest rate is tiered and compounded and credited monthly. Therefore, if the balance increases, the interest rate also increases so that account holders can earn higher profits in the form of interest.