Bank Cost of Funds

1
Bank Cost of Funds
2
Cost of Funds

• G K Chp. 13
• Structure of Liabilities
• Cost of Components

3
Structure of Liabilities

• Demand Deposits (Non-Int MMDA)
• Savings (Regular, Money Mkt Svgs)
• Small Time Deposits (CDs)
• Large Time Deposits (Jumbo CDs)
• Fed Funds Repos

4
Pricing Policy

• Explicit
• Rates on MMDA, MM Svgs, Small CDs
• Implicit
• Amounts of Jumbo CDs and Fed Funds used
• Fees on Reg Ckg Accts
• Fees on Comml Accts and CC Processing

5
Pricing in Simulation

• Comml Deposits
• Chg/Item, Credit per 100, CC Fee,
  New Bus and Off Time Alloc.
• Has an effect on Balance, S/C Income, Loan
  Commitmts CC Income
• Regular Deposits
• Chg/Item, Credit per 100, New Bus and Off Time
  Alloc., Dev Budget, Premises
• Has an effect on Balance, S/C Income, Trust Income

6
Pricing in Simulation

• Money Market Savings
• Rate, New Bus and Off Time Alloc., Dev Budget,
  Premises
• Has an effect on Balance, Trust Income

7
Cost of Funds

• Calc Avg Cost of Funds and compare with Prime
  Rate on Pg. 7
• Lower Cost of Funds means able to offer lower
  loan rates ? Attract more business
• Cost of Funds differs from WACC as specific acct.
  by acct. tally of funds costs. WACC is a
  composite of equity and debt expectations for
  return (see Pg. 23 for WACC calculation)

8
Cost of Funds (Handout)

• Base is Net Deposits
• Total DepFFPurchFRB-CashDueFrom
• Costs are Int and Non-Int Expenses
• Total Int Paid (excluding Cap Note Int)
• Non-Int Expenses from each account times its
  related expense multiplier (take as given)
• Less Net Service Charge Income
• Cost of Funds Costs 4 / Base