Principals of Finance
June 3, 2014
Questions and Applications
7) Borrowing from the Federal Reserve: Describe the process of “borrowing at the Federal Reserve.” What rate is charged, and who sets it? Why do banks commonly borrow in the federal funds market rather than through the Federal Reserve?
“Borrowing at the discount window” represents the borrowing by depository institutions from the Federal Reserve. The interest rate charged on these loans is known as the discount rate is set by the FED.
Banks tend to prefer the federal funds market over the discount window because the Fed may monitory the bank’s reasons for borrowing. The Fed’s discount window is ...view middle of the document...
The commercial banks were one of those entities. Commercial banks were created to provide financial services directly to business and consumers. The banks sources of funds are received through deposit accounts, borrowed funds, and long-term sources of funds. They can borrow from other banks, Federal Reserve, and other sources to solve temporary deficiency in funds.
1) Regulation of Bank Sources and Uses of Funds: How are a bank’s balance sheet decisions regulated?
Banks are required to pay a premium on deposits, and to maintain a minimm level of capital, and are restricted to a maximum loan amount to any single borrower. They cannot use borrowed or deposited funds to purchase common stock They can only invest in bonds that are considered “investment-grade” quality.
3) Moral Hazard and the Credit Crisis: Explain why the moral hazard problem received so much attention during the credit crisis.
Moral hazard was a serious problem during the credit crisis because the government was attempting to prevent failures of banks. Yet, some critics...