Answer-first summary for fast verification
Answer: Bank A should borrow from the Federal funds market and Bank B should borrow from the Federal Home Loan Banks.
**Correct Answer: C** **Explanation:** - **Bank A** has a shortfall in legal reserves for the day, which requires immediate funding. The Federal funds market is ideal for this situation because: - It provides overnight funding - It's specifically designed for reserve requirements - It offers quick access to funds to meet daily reserve obligations - **Bank B** has experienced a shortfall in long-term CD renewals to fund its mortgage portfolio. The Federal Home Loan Banks Advances Program is appropriate because: - It provides longer-term funding that can match the duration of mortgage assets - It's specifically designed for housing finance - It offers stable, term-matched funding for mortgage portfolios **Why other options are incorrect:** - **A**: Both involve deposit funding, which doesn't address the non-deposit funding needs - **B**: Commercial paper market is not suitable for Bank A's immediate reserve needs, and Federal funds market is too short-term for Bank B's mortgage funding - **D**: Debentures are long-term and not suitable for Bank A's immediate reserve needs, and commercial paper is too short-term for Bank B's mortgage funding **Reference:** Peter Rose, Sylvia Hudgins, Bank Management & Financial Services, 9th Edition (New York, NY: McGraw-Hill, 2013). Chapter 13 - Managing Non-deposit Liabilities
Author: LeetQuiz .
Ultimate access to all questions.
Two financial institutions are facing different funding issues. Bank A, a mid-size regional bank, is concerned that it has a shortfall in legal reserves for the day and is seeking an alternative to address this shortfall. Bank B, a small community bank, on the other hand, has recently experienced a much greater than anticipated shortfall in long term certificates of deposit (CD) renewals due to fierce local competition for retail deposits. Bank B has traditionally used stable CDs to fund its home mortgage portfolio. What is the most appropriate funding response of each of these two institutions considering timing and the availability of non-deposit funds?
A
Bank A should borrow from the wholesale deposit market and Bank B should fund itself through the Eurocurrency deposit market.
B
Bank A should fund itself through the commercial paper (CP) market and Bank B should borrow from the Federal funds market.
C
Bank A should borrow from the Federal funds market and Bank B should borrow from the Federal Home Loan Banks.
D
Bank A should issue debentures and Bank B should fund itself through the CP market.
No comments yet.