Question

U8 Assignment

The core of banking functions and success is their sources of funds. Describe in detail the various sources of bank funds (money), how they acquire these funds and who provides the funds. Similarly discuss the alternative sources of funds if a bank finds itself short of cash. Lastly, discuss why a bank might issue a bond.

● By most standards, Money Market accounts are a newer funding source for banks versus traditional savings and checking accounts. Discuss how Money Market accounts are different.

Answer 1

Various sources of bank funds-

A. Bank's own funds

B. Borrowed funds

A. Bank' s own funds

1. Paid up capital

2. Reserve fund

3. Portion of undistributed profit

1. Paid up capital- The amount with which a banking company is registered is called authorised capital. This authorised capital is further divided into two parts I. E. Paid up capital and Subscribed capital.

Banks consider paid up capital as source bof fund.Paid u capital is that amount of money which they receive from shareholders.

2. Reserve fund-Reserve is another source of fund which is maintained by all commercial bank.

3. Undistributed profit- Banks/ Companies share some part of earned profit with its shareholders i.e called Dividend and keeps another portion of undistributed profit set aside for business or another purpose.

B. Borrowed funds- It mainly comes from deposits which are accepted on varying terms in different accounts.

Borrowing can be collected either from customers, from Central Bank or from other sources.

From Customers- Banks collect 3 kinds of deposits from its customers.

I. Demand Deposit

ii. Saving Deposit

iii. Fixed or time deposit

From Central Bank- The commercial bank borrows loans from Central Bank at the time of emergency.

From other sources- Banks raisebfunds by issuing bonds, debentures, cash certificate etc.

Deposits- Public deposits are a powerful source of funds to a bank.

Banks issue perpetual bonds in addition to AT1 bonds. These bonds are issued to raise additional Tier 1 capital, as per the Basel3 norms, they ensure that a financial institutions' capital requirements are met.

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Money market account is very much similar to money market mutual fund, these are more similar to saving account with some additional benefits of a checking account as well.

Money market accounts often have higher minimum investment and balances than regular savings account but offer higher returns.

They also allow account holders to write a limited number of checks or more limited debit card purchases from the account each month.( Upto 6 in a month)

Money market accounts are held at banks or credit unions. They are FDIC insured if they are at a bank and insured by the National credit union administration if they are at a credit union.