115 CFA
File: Fixed Income - Reading 43 - 5. Short-Term Funding Alternatives Available to Banks

5. Short-Term Funding Alternatives Available to Banks

h. describe short-term funding alternatives available to banks;

i. describe repurchase agreements (repos) and the risks associated with them.

What are four different short-term funding sources available to banks?
- Retail deposits
- Central bank funds
- Interbank funds - loans and deposits between banks
- Large denomination negotiable certificates of deposit

What is a repurchase agreement?
A repurchase agreement is the sale of a security with a commitment by the seller to buy the same security back from the purchaser at a specified price at a designated future date. It is actually a collateralized loan.

In regards to bank loans, what is an overnight repo? What is a term repo?
A loan for one day is called an overnight repo. A loan for more than one day is called a term repo.

What is a reverse purchase agreement?
From a dealer's perspective, if it is lending cash, the repo is then referred to as a reverse repurchase agreement.

What is the repo margin?
The difference between the market value of the security used as collateral and the value of the loan is the repo margin.

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