Describe the two types of fed funds transactions.
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Two forms of federal funds transactions are commonly used i Negotiations between two commercial banks often take place directly over the telephone between the money dealers of the banks involved ii The transaction may occur through a fed funds broker Figure 53 illustrates the two methods through which a fed funds transaction can occur For example a bank that finds itself with 75 million in excess reserves can call its correspondent banks to see if they need overnight reserves The bank will then sell its excess reserves to those correspondent banks that offer the highest rates for these fed funds When a transaction is agreed upon the lending bank instructs its district Federal Reserve Bank to transfer the 75 million in excess reserves to the borrowing banks reserve account at its Federal Reserve Bank The Federal Reserve Systems wire transfer network Fed wire is used to complete the transfer of funds The next day the funds are transferred back via Fed wire from the borrowing bank to the lending banks reserve account at the Federal Reserve Bank plus one days interest Overnight fed fund loans will likely be based on an oral agreement between the two parties and are generally unsecured Increasingly participants in the fed funds markets do not hold balances at the Federal Reserve In this case the fed funds transaction is settled in immediately available funds fed funds on deposit at the lending bank that may be transferred or withdrawn with no delay In this case a federal funds broker typically a commercial bank ...View the full answer
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Related Book For
Financial Markets and Institutions
ISBN: 978-0077861667
6th edition
Authors: Anthony Saunders, Marcia Cornett
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