Question

What are the major sources of funds for commercial banks?

What alternatives does a commercial bank have if it needs temporary funds?

What is the most common reason that banks issue bonds?

Thanks

Answer 1

Commercial banks are financial institution that accept deposit, providing banking service, making loans and offer basic financial products like CD, Savings account and other various deposits and accounts. These are provided by bank for gaining capital for doing their banking activities. The interest rate which they are charged for lending money will be larger than interest they paid.

Source of funds for commercial bank

The main fund for commercial bank is from deposits. They accept deposits and utilize it for their banking purpose. The other way of funding for commercial bank is borrowing from other bank. They can borrow money from central bank and other commercial banks. The amount of money or fund earned by commercial bank is diffrence of interest paid by bank and interest earned by bank. By this interest income also they can done their banking activities. These are the main source of funds for commercial banks.

Alternative source of funds for temporary needs

There are some other sources of funds which a bank have. These are explained below.

The can use borrowed capital which include the loans and bonds issued by banks . This could be short term or long term in nature. Short term funds included interbank tradings, call takings from other banks, commercial papers etc. Shareholders equity will also helps to raise funds for banks. These are stock issued by banks and public can buy it so that bank can raise the funds required by them. These are some alternatives way which a bank can raise funds for its temporary needs.

Reason for issue of bonds

The main reason behind issue of bond is liquidity factor. Banks needs to maintain its liquidity all the time. So inorder to meet this liquidity needs this is one of the way that to issue bonds. The bonds have periodic coupon and par value at its maturity. These are issued for raising capital from investors. Here by issuing bonds they dont need to dilute their current shareholders equity. Banks issue bonds for avoiding borrowing from other banks and here they can raise funds themselves. This is the main reason banks issue bonds.