| Course | FIN 335 Financial Markets |
|---|---|
| Module | Module 3 |
| Paper type | undergraduate assignment analyzing Federal Reserve tools and monetary policy transmission |
| Length | About 1,030 words, 6 pages |
| Format | APA 7 student paper |
| School | Southern New Hampshire University |
| Program | BS Finance |
| Updated | October 2026 |
Free sample paper for FIN 335 Module 3
Monetary Policy Transmission to a Community Bank, 2022-2024
[Student Name]
Southern New Hampshire University
FIN 335: Financial Markets
Module Three Assignment
[Instructor Name]
[Date]
The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.
Monetary Policy Transmission to a Community Bank, 2022-2024
Introduction
Monetary policy is decided in Washington, but its effects show up in places like a community bank's branch in Billings, Montana. Between March 2022 and July 2023 the Federal Reserve raised its policy rate by more than five percentage points and began shrinking its balance sheet. This paper explains the tools the Fed used and then traces four channels through which those decisions reached a composite $2.4 billion Montana bank: its deposits, its lending, the value of its bonds and its access to liquidity.
The Fed's Tools
Policy starts with the Federal Open Market Committee choosing a band for the federal funds rate, the price of borrowing reserves from another bank until the next morning. Before 2008 the Fed hit its target by adding or removing small amounts of reserves through open market operations. Today the banking system holds trillions of dollars of reserves, and the Fed uses what it calls an ample-reserves framework. It pays interest on reserve balances, which sets a floor under what banks will accept to lend reserves, and, through its overnight reverse repo window open to money funds and certain other nonbank investors, sets a floor for a wider set of investors. When the committee raised its target, it raised both administered rates, and market rates followed. Reserve requirements, still described in many textbooks, have been set at zero since March 2020.
Two other tools mattered. Starting in June 2022, the Fed let up to $95 billion a month of Treasury and mortgage-backed securities mature without replacing them, shrinking its holdings and putting upward pressure on longer-term yields. And through forward guidance, statements about where rates were likely headed, it shaped expectations and therefore the yield curve discussed in Module Two.
Channel One
Drechsler et al. (2017) describe a deposits channel of monetary policy: when the Fed raises rates, banks raise deposit rates only partly, because many depositors stay for convenience, and the widening gap pushes some money out of banks. That is what happened in Billings. By early 2023, money market funds were paying more than 4.5 percent while the bank's savings accounts paid under 1 percent. Larger depositors, including grain elevators and county governments, moved balances into Treasury bills and money market funds. Deposits fell from a peak of $2.05 billion in mid-2022 to $1.92 billion at the end of 2023, a drop of about 6 percent. Across the country, commercial bank deposits fell in 2022 and 2023, the first sustained decline in decades.
Channel Two
Higher rates reduced loan demand. Farmers delayed equipment purchases as operating-loan rates approached 9 percent, and two local builders postponed apartment projects when construction loan rates passed 8 percent. At the same time, the bank tightened its own standards, requiring larger down payments on commercial real estate. Loan growth slowed from 11 percent in 2022 to 2 percent in 2023. This is the bank lending channel at work: less funding and higher rates together reduce the supply of and demand for credit.
Channel Three
The bank had invested much of its pandemic-era deposit growth in agency mortgage-backed securities, municipal bonds and Treasuries yielding, on average, well under 2 percent. As market yields rose, the value of those bonds fell. Unrealized losses on the $620 million portfolio peaked near $80 million in October 2023, when the 10-year Treasury yield approached 5 percent. Those losses did not reduce the bank's regulatory capital, but they would become real if the bonds had to be sold.
Channel Four
That risk became urgent in March 2023, when Silicon Valley Bank failed after depositors withdrew $42 billion in a single day. The Federal Reserve's review found that the bank's managers and supervisors had failed to address its exposure to rising rates and its reliance on uninsured deposits (Board of Governors of the Federal Reserve System, 2023). On March 12, the Fed created the Bank Term Funding Program, lending to banks for up to a year against Treasury and agency securities valued at par rather than market value. The Billings bank, whose uninsured deposits were about 31 percent of the total, borrowed $60 million from the program in April as a precaution and repaid it in early 2024. Jiang et al. (2024) estimated that unrealized losses and uninsured deposits left many U.S. banks vulnerable to runs in 2023, which explains why the program was needed.
Earnings
The four channels showed up together in the bank's income statement. Net interest income, which had grown with the loan book in 2022, fell about 7 percent in 2023 as deposit costs climbed faster than loan yields. Fee income held steady. The bank set aside more for possible loan losses as farm incomes fell with lower grain prices, although actual losses stayed low. Return on assets fell from 1.24 percent in 2022 to 0.92 percent in 2023. The bank's leaders cut planned hiring and delayed a branch remodel in Gillette, Wyoming. These are the ordinary, unglamorous ways monetary policy slows an economy: one institution at a time, through decisions to hire, lend and invest a little less.
Policy Reversal
Since September 2024, the Fed has lowered its target range, and in late 2025 it stopped shrinking its securities holdings. For the Billings bank, the reversal is working through the same channels in the opposite direction, but slowly. Deposit rates are falling more gradually than they rose, because the bank fears losing depositors who have learned to move money. Loan demand has recovered somewhat in construction but not yet in agriculture, where prices remain weak. Long-term yields have stayed relatively high, so the bond losses have narrowed only partly. Monetary policy, in short, acts with long and uneven lags, and its effects on any single institution depend on how that institution is funded and what it holds.
Conclusion
The Fed's rate increases, balance sheet runoff and guidance reached the Billings bank through lower deposits, slower lending, paper losses on bonds and a sudden need for liquidity. None of these threatened the bank's survival, but together they reduced its earnings and tested its funding. Project One examines what the bank should do about its bond portfolio now.
References
Board of Governors of the Federal Reserve System. (2023). Review of the Federal Reserve's supervision and regulation of Silicon Valley Bank. https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf
Drechsler, I., Savov, A., & Schnabl, P. (2017). The deposits channel of monetary policy. The Quarterly Journal of Economics, 132(4), 1819-1876. https://doi.org/10.1093/qje/qjx019
Jiang, E. X., Matvos, G., Piskorski, T., & Seru, A. (2024). Monetary tightening and U.S. bank fragility in 2023: Mark-to-market losses and uninsured depositor runs? Journal of Financial Economics, 159, 103899. https://doi.org/10.1016/j.jfineco.2024.103899
What the FIN 335 Module 3 instructions ask for
The FIN 335 Module Three assignment usually asks you to explain the structure and tools of the Federal Reserve and how monetary policy affects financial markets, institutions and the economy. Directions may ask about open market operations, the discount window, reserve requirements, interest on reserves, quantitative tightening and forward guidance, and about channels of transmission. Strong papers describe the tools the Fed actually uses now rather than older textbook mechanics, use a recent episode and trace each step to a real or realistic institution with dates and figures. Some prompts ask you to evaluate whether the Fed's response was appropriate, so be ready to take a position supported by evidence.
How this FIN 335 Module 3 monetary policy assignment example is built
The paper explains that the Fed now steers short-term rates mainly by setting the interest it pays on bank reserves and the rate on its overnight reverse repurchase facility, not by adjusting the quantity of reserves. It describes the balance sheet runoff that began in June 2022. It then traces four channels to the Billings bank: deposits fell from $2.05 billion to $1.92 billion as customers chased higher yields, farm and construction loan demand slowed, unrealized bond losses peaked near $80 million and, after the March 2023 failures, the bank borrowed $60 million from the Fed's new term program as a precaution. It closes by noting that the reversal since 2024 is working through the same channels, but more slowly.
Where the FIN 335 Module 3 rubric puts the points
Graders of this assignment usually weigh accurate description of the Fed's structure and tools, understanding of current operating procedures, explanation of transmission channels, use of a recent episode with dates and figures, and clear writing. Papers that score well explain how the Fed sets rates in today's ample-reserves system, connect each tool to an effect on an institution and use sources such as Fed publications or research. Papers lose credit for describing reserve requirements as an active tool, for undated claims and for listing tools without explaining how they work. Some rubrics also reward attention to the lags in monetary policy and to differences across institutions.
FIN 335 Module 3 help: the mistakes that cost points
Many textbooks still describe the Fed changing the money supply through open market purchases and reserve requirements. Since 2020 reserve requirements have been zero, and the Fed sets rates mainly through interest on reserve balances and its reverse repurchase facility. Check a current Fed source before writing. Then pick one episode, such as 2022 to 2024, and trace each channel: deposits, lending, asset prices and liquidity. Use dates and numbers so the reader can follow cause and effect. Use the Fed's own implementation notes or its monetary policy reports for current tools, and date each one. A short timeline table of rate decisions helps the reader keep events in order. Keep the focus on one institution so the paper does not become a general history.
Get FIN 335 Module 3 written to your instructions
Send the FIN 335 Module 3 directions and any readings assigned. The paper will explain the Fed's tools as they work today and trace each channel of policy to a specific institution with dated figures. About two days, and the first assignment is free. The paper above is an original model document written by our desk, not a submitted student paper and not an official Southern New Hampshire University document.
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FIN 335 Module 3 questions, answered
Where can I find a free FIN 335 Module 3 Monetary Policy sample?
This page includes the complete FIN 335 Module 3 paper tracing the Federal Reserve's 2022-2024 tightening to a community bank.
How does the Federal Reserve set interest rates today?
Mainly by setting the interest rate it pays on banks' reserve balances and the rate on its overnight reverse repurchase facility, which keep the federal funds rate within its target range.
What is quantitative tightening?
The Fed's reduction of its holdings of Treasury and mortgage-backed securities, usually by letting them mature without reinvesting, which removes reserves and tends to raise longer-term rates.
What is the deposits channel of monetary policy?
The idea that when the Fed raises rates, banks raise deposit rates only partly, so depositors move money elsewhere and banks have less funding to lend.
What was the Bank Term Funding Program?
An emergency Federal Reserve facility created in March 2023 that lent to banks for up to a year against Treasury and agency securities valued at par.