Lesson 3 of 6 · 11 min
How banks fund themselves: deposits, CDs and the interbank market
A bank earns the gap between what its loans and securities yield and what it pays for funding, and it fills its short-term funding needs from deposits, certificates of deposit, interbank loans, CP and repos.
In short
- Banks are intermediaries: assets are mostly loans and securities; liabilities are deposits, securities sold and short-term borrowing. Net interest margin = return on assets − cost of liabilities.
- Demand deposits (checking accounts) pay little or no interest but are a stable source; operational deposits from clearing, custody and cash management are also stable.
- Certificates of deposit (CDs): fixed term (usually under a year), interest at maturity. Non-negotiable CDs carry an early-withdrawal penalty; negotiable CDs can be sold in the market.
- The interbank market lends overnight to one year, secured or unsecured, at rates tied to an MRR, with counterparty limits.
- Banks short of reserves borrow in the central bank funds market; as a last resort they use the discount window: collateral, a higher rate and closer supervision.
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