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 Comm’l Accts and CC Processing

5. Pricing in Simulation • Comm’l 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 Dep+FFPurch+FRB-Cash&DueFrom • 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