FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities
A regional bank has excess reserve balances at its Federal Reserve account and agrees to lend them unsecured to another bank until the next business day. Which description best fits this transaction?
The transaction is a federal funds sale: an unsecured overnight loan of reserve balances between depository institutions. No securities are pledged, which distinguishes it from repurchase agreements, and it is not commercial paper because no note is issued to investors.
- AA federal funds sale, which is an unsecured overnight loan of reserve balances between depository institutionsCorrect
- BA repurchase agreement, because the lending bank receives Treasury securities as collateral
- CA reverse repurchase agreement, because the borrower promises to repurchase securities the next day
- DA commercial paper placement, because the borrowing bank issues a discount note to investors
Explanation
Federal funds are unsecured, typically overnight loans of balances held at the central bank between depository institutions. The lender is a seller of fed funds. A repo or reverse repo involves securities as collateral, which this transaction does not have. Commercial paper is issued to investors in the money market and is not an interbank reserve loan.
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