Q13.3 What are borrowed funds? Give some specific examples. Have borrowed funds become more or less important as a source of funds for banks?
Borrowed funds are a short-term borrowings by commercial banks from the wholesale money markets. These borrowings may include banker’s acceptances, debt issues, and loan capital. Borrowed funds have become more important as a source of funds because they are used for liquidity purposes and for large banks they are used to generate revenue (financial leverage).
Q13.7 What are the major uses of funds for a bank? What are the differences between large and small banks? Explain the difference.
The major use of funds is to meet the short-term liabilities of the bank. Small banks have more deposits for liquidity purposes and large banks while they do have deposits they also have the ability to tap into money markets. Also large banks do more consumers lending and they also have large trading accounts that smaller banks do not.
Q13.9 What do we mean by ‘off-balance-sheet’ activities? If these things are not on the balance sheet, are they important? What are some off-balance-sheet activities?
Off balance sheet activities are activities that relate a banks capital to its risk profile so that high-risk activities, which require relatively more bank capital, can be met. Banks’ major off-balance sheet activities include loan commitments, standby letters of credit, loan brokerage, securitization, and derivative securities. These also generate income for banks in the form of fees or gains in the value of the contracts, which makes them extremely important.
Q13.11 What is a contingent asset? What is a contingent liability? Provide an example of each.
Contingent asset: Offers potential gains such as loan commitments and unrealized gains on derivative securities contracts.
Contingent liability: Potential losses an example would be letters of credit and unrealized losses on derivative securities contracts....