FIN 335 Module 5 Money Markets Assignment Example

Short-Term Funding Plan for Spring 2027

[Student Name]

Southern New Hampshire University

FIN 335: Financial Markets

Module Five 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.

Short-Term Funding Plan for Spring 2027

Introduction

Community banks in farm country have seasonal funding needs. Each spring, ranchers and grain farmers draw on deposits and credit lines to pay for seed, fertilizer and calving costs, and deposits rebuild after harvest and cattle sales in the fall. Next spring the composite Billings bank also expects a county treasurer to move $40 million of tax receipts into the Montana Board of Investments' short-term pool, which currently pays more than the bank's public funds rate. Together, about $90 million of deposits are expected to leave between March and May 2027. This paper explains the money market instruments the bank could use to replace that funding and recommends a plan.

The Need

Of the $90 million, $50 million is seasonal and should return by November; $40 million from the county could return if rates change or the county's needs shift, but should be treated as gone for planning. The bank's cash and reserve balances at the Fed are about $95 million, but it wants to keep at least $70 million as a liquidity buffer. So it needs about $65 million to $90 million of replacement funding for six to nine months.

Treasury Bills

Treasury bills are short-term government debt sold at a discount and repaid at face value, maturing in four weeks to a year. They are the safest and most liquid money market instrument. The bank holds $25 million of bills maturing in March and April, which can simply be allowed to mature and not be replaced. That covers part of the need at no added cost, beyond giving up the bills' yield.

Federal Funds

Federal funds are unsecured overnight loans of reserves between banks. The bank has lines totaling $75 million with three larger correspondent banks. Fed funds are fast, available the same day, but overnight funding must be renewed daily, and correspondents can cut unsecured lines without notice when conditions worsen, exactly when a bank needs them. They suit day-to-day timing gaps, not six months of funding.

Repurchase Agreements

In a repo, the bank sells securities and agrees to buy them back later at a slightly higher price; the difference is the interest. Because the loan is secured, it costs less than unsecured borrowing. But lenders apply a haircut, lending less than the securities' market value, and haircuts can rise sharply under stress. Gorton and Metrick (2012) showed how rising haircuts in 2007 and 2008 drained funding from banks that relied on repo, a run that looked different from a deposit run but had the same effect. The bank's underwater bonds would also support smaller repo loans because they are valued at market.

Federal Home Loan Bank Advances

As a member of its regional Home Loan Bank in Des Moines, the bank can borrow advances of almost any term, secured mainly by pledged mortgage and farm real estate loans. Its available capacity is about $400 million. Advances are reliable and moderately priced, and their terms can be matched to the need: a six-month or nine-month advance fits a seasonal outflow. Ashcraft et al. (2010) describe the Home Loan Banks as a lender of next-to-last resort, a source banks turn to in stress before the Fed. One caution: heavy advance borrowing by failing banks in 2023 drew criticism, so the bank should use advances for planned needs, not as a sign of distress.

Brokered and Reciprocal Deposits

Brokered deposits are certificates of deposit placed by brokers on behalf of investors nationwide. They raise money quickly but cost more than local deposits, leave when a better rate appears and are watched by regulators. Reciprocal deposits work differently: through a network, the bank can split a large customer's balance among many banks so all of it is insured, while receiving an equal amount back. Offering this to the county might keep part of its $40 million, since the county's concern includes safety as well as yield.

The Discount Window

The Federal Reserve lends directly to banks through its discount window. Primary credit is available to sound banks at a rate slightly above the top of the federal funds target range, secured by pledged collateral. Banks long avoided it out of fear that borrowing signaled weakness. After 2023, regulators urged banks to pledge collateral in advance and test the window so it could be used quickly. Mishkin and Eakins (2018) note that the window works as a backstop only if banks are prepared to use it.

Comparing funding sources

Recommendation

The bank should let the $25 million of Treasury bills mature, offer the county reciprocal placement to try to retain $15 to $20 million, and take a series of six- and nine-month Home Loan Bank advances of about $45 million timed to the seasonal draws. Fed funds lines cover daily swings. The discount window, with collateral pledged and tested each quarter, stays ready as a backup. Brokered deposits are kept in reserve.

Costs

At current market levels, the advances cost somewhat more than the deposits they replace, so the plan raises the bank's funding cost by roughly $400,000 over the spring and summer, less if the county keeps part of its balance through reciprocal placement. That is a modest price for funding that cannot be withdrawn on short notice.

Conclusion

A seasonal, predictable outflow calls for term funding that matches it, which the Home Loan Bank provides at moderate cost. Overnight and unsecured sources fill gaps but fail in stress, as repo did in 2008. Preparing the discount window in advance turns the lender of last resort into a usable backup rather than a signal of trouble.

References

Ashcraft, A., Bech, M. L., & Frame, W. S. (2010). The Federal Home Loan Bank System: The lender of next-to-last resort? Journal of Money, Credit and Banking, 42(4), 551-583. https://doi.org/10.1111/j.1538-4616.2010.00299.x

Gorton, G., & Metrick, A. (2012). Securitized banking and the run on repo. Journal of Financial Economics, 104(3), 425-451. https://doi.org/10.1016/j.jfineco.2011.03.016

Mishkin, F. S., & Eakins, S. G. (2018). Financial markets and institutions (9th ed.). Pearson.