Question

1. Checking accts & MMDA's are very similar. Where would you put your $ & why?

2.What reserve requirement would you put on banks? Why? Does the type of loans the bank make effect your decision?

3. If I rates are increasing is that a + or - for bank earnings?

Answer all 3 please thank you!

Answer 1

Checking Accounts: Checking accounts offer a simple, quick way to access your money. You can deposit as often as you like, and most banks will give you an ATM card to use at stores or withdraw cash from an ATM. You can write checks using this account as well.

• Some checking accounts pay interest. These are called negotiable order of withdrawal (NOW) accounts. The most common type is the demand deposit account, which does not pay interest.
• There are often fees associated with checking accounts. Some banks charge a monthly maintenance fee regardless of the balance. Some charge a monthly fee if the account balance falls too low. There may also be transaction fees, check fees, or ATM withdrawal fees.

Money Market Deposit Accounts (MMDA): A MMDA is an account which accumulates interest, usually at a higher rate than a checking or savings account.

• Money Market Deposit Accounts (MMDAs) are a type of savings account.
• MMDAs are a very safe investment, though are generally more useful in the short term than as a long-term investment.
• Flexibility and liquidity set MMDAs apart from several types of common interest-bearing savings, but there are many factors to take into account before choosing them over other forms of savings.

However, you will need to meet or exceed a certain balance in the account to gain that interest. The interest rate may rise as the balance grows.

• You can write checks from a MMDA, but it’s not as easy to withdraw from an MMDA. You are limited to 6 transfers per month, and only 3 of those transfers may be in the form of a check. There are usually transaction fees associated with MMDA’s.

Most money market deposit accounts pay a higher interest rate than regular passbook savings accounts and often include check-writing and debit card privileges. MMDAs also come with restrictions that make them less flexible than regular checking or savings accounts. Checking accounts have one big advantage over MMDAs—unlimited transactions (checks, ATM withdrawals, wire transfers, and so forth). They are also FDIC- or NCUA-insured. This makes checking accounts perfect for daily financial transactions, such as writing checks, electronic bill payment and access to cash through an ATM. The main weakness of regular checking accounts is that they offer a very low (often zero) interest rate. So as per one's interest and liquidity account one can choose to invest in a MMDA or checking account.

The reserve requirement is the total amount of funds a bank must have on hand each night. It is a percentage of the bank's deposits. The nation's central bank sets the percentage rate.

In the United States, the Federal Reserve Board of Governors controls the reserve requirement for member banks. The bank can hold the reserve either as cash in its vault or as a deposit at its local Federal Reserve bank.

The reserve requirement applies to commercial banks, savings banks, savings and loan associations, and credit unions. It also pertains to U.S. branches and agencies of foreign banks, Edge Act corporations, and agreement corporations.

• The federal reserve requirement is the amount of money the Federal Reserve requires its member banks to store in its vaults overnight.
• Requiring banks to have a reserve requirement serves to protect them and their customers from a bank run.
• When the Fed adjusts the reserve requirement, it allows banks to charge lower interest rates.
• Banks often take on a financial burden when limits change, so the Fed often uses open market operations instead to influence banks.

The Fed uses these tools to control liquidity in the financial system. When the Fed reduces the reserve requirement, it's exercising expansionary monetary policy. That creates more money in the banking system. When the Fed raises the reserve requirement, it's executing contractionary policy. That reduces liquidity and slows economic activity.

Because central bank funding is collateralized, ader a hike in RR banks experience a reduction in their liquid assets. • ↑ CB funding ↓ Bank liquidity

A decline in liquid assets may induce credit slowdown through a porfolio re-adjustment process.

• ↓ Bank liquidity ↓Loans

Central bank policies affect the funding needs and the liquidity position of banks

• Changes in bank liquidity affects bank lending

• Reserve requirements have the potenial to be used as an additional tool to affect bank lending behavior and ease the trade-off between price stability and financial stability.

Home loans are usually affected by cash reserve requirements and repo rates.

The banking sector's profitability increases with interest rate hikes. Institutions in the banking sector, such as retail banks, commercial banks, investment banks, insurance companies, and brokerages have massive cash holdings due to customer balances and business activities.

Increases in the interest rate directly increase the yield on this cash, and the proceeds go directly to earnings. An analogous situation is when the price of oil rises for oil drillers. The benefit of higher interest rates is most notable for brokerages, commercial banks, and regional banks.

These companies hold their customers' cash in accounts that pay out set interest rates below short-term rates. They profit off of the marginal difference between the yield they generate with this cash invested in short-term notes and the interest they pay out to customers. When rates rise, this spread increases, with extra income going straight to earnings.

Another indirect way in which interest rate hikes increase profitability for the banking sector is the hikes tend to occur in environments in which economic growth is strong, and bond yields are rising. In these conditions, consumer and business demands for loans spike, which also augments earnings for banks.

As interest rates rise, profitability on loans also increases, as there is a greater spread between the federal funds rate and the rate the bank charges its customers. The spread between long-term and short-term rates also expands during interest rate hikes because long-term rates tend to rise faster than short-term rates. This has been true for every rate hike since the Federal Reserve was established early in the 20th century. It reflects the strong underlying conditions and inflationary pressures that tend to prompt an increase in interest rates. This is an optimal confluence of events for banks, as they borrow on a short-term basis and lend on a long-term basis.