Banking and the Management of Financial Institutions - Assets: uses of funds
3 important questions on Banking and the Management of Financial Institutions - Assets: uses of funds
Once banks have funds, what do they do with it?
- They need to hold reserves (deposits)+ currency)
- Cash in process of recollection
- Deposits at other banks
- Securities (federal/local government)
- Loans (assets)
- Other asset (buildings,..)
What two kinds of reserves are there?
- Required reserves: regulation that for every dollar in deposits, a certain fraction must be kept in reserves: 10% (required reserve ratio)
- Excess reserves: additional reserves a bank holds to meet its obligations when funds are withdrawn
Why does the bank earn higher interest rates on loans?
Because of lack of liquidity and higher default risk
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