Primary sources of funds for commercial banks are deposits, nondeposit liabilities and borrowed funds. Deposits are by far the largest funding source for commercial banks. They are finances deposited by account holders for future transactions and safekeeping. They include the typically saving and checking accounts that many people presently have. On the other hand, nondeposit liabilities form the second biggest source of bank funding. They represent a wide concept including various items like liabilities for capitalized leases, deferred income tax, borrowed money, mortgage indebtedness, accrued expenses and unpaid, and also the subordinated notes and debentures (Madura, 2012). Borrowed funds represent temporal borrowings mainly from extra needed reserves which are loaded to it by another bank or bank borrowing by its securities from another financial institution or large corporate client. Small banking institutions rely much on retail time depositions, savings and transactions whereas Large banks make good use of negotiable deposits in real time and nondeposit liabilities encompassing repurchased agreements as well as federal funding (Ryan-Collins et al. 2014).
Investment securities, loans and leases, and cash assets continue to be the main uses of retail banking funds within the banking industry. Loans though are the principal use of commercial funds and also the primary way of earning income. They are typically created for fixed rates, terms and are always secured with actual property (Ryan-Collins et al. 2014) Commercial loans are comparatively more useful for the larger banks, whereas, small businesses and consumer loans, and residential mortgages matter more for smaller banks. All these loan types generate credit, though to varying degrees, liquidity risk for these financial institutions
Commercial banks are exploring the trending trend credit card lending which provides lucrative fees for these banks. Default rates for credit lending are higher than those of mortgage lending or any other form of secured lending (Madura, 2012).
Madura, J. (2012). Financial institutions and markets. Mason, OH: South-Western Cengage Learning.
Ryan-Collins, J., Greenham, T., & Werner, R. (2014). Where Does Money Come From?: A Guide to the US Monetary & Banking System. London: New Economics Foundation.