Go Back   ManagementParadise.com | Management & Business Education Learning Platform Resolve Your Query - Get Help and discuss Projects > Financial Management ( FM )

Call Money Market

Discuss Call Money Market within the Financial Management ( FM ) forums, part of the Resolve Your Query - Get Help and discuss Projects category; Call money market is that part of the national money market where day to day surplus funds, mostly of banks ...

Reply

 

Thread Tools Display Modes
Call Money Market
Old
 (1 (permalink))
Sunanda K. Chavan
sunandaC has a spectacular aura aboutsunandaC has a spectacular aura aboutsunandaC has a spectacular aura about
 
sunandaC
Management Paradise Guru
 
Status: Offline
Posts: 6,680
Join Date: Jul 2010
Call Money Market - September 16th, 2010

Call money market is that part of the national money market where day to day surplus funds, mostly of banks are traded in. the loans made in this market are of a short term nature, their maturity varying between one day to a fortnight. As these loans are repayable on demand and at the option of either the lender or the borrower, they are highly liquid, their liquidity being exceeded only by cash.

Before discussing various aspects of the call money market in India, it is necessary to remember that the nature of this market varies in different countries. But all have a common feature that they deal; in loans which have a very short maturity and are highly liquid. As R.S. Sayers has pointed out, “everywhere banks look in their assets for a nice combination of profit and liquidity and this leads to a considerable degree of similarity in balance sheet structures. The similarity cannot amount to uniformity because there is no uniform availability of assets for bankers in different countries.”

As the complexity of the call money market is usually lost sight of we will briefly discuss here the nature of this market in the U.S. and the U.K. and then it’s working in India.

In the U.S. there are two markets, which can be said to form the call money market:

(a) Federal funds market
(b) Call money market proper
A federal fund transaction is defined

“As any transaction between banks involving the purchase (borrowing) or sale (lending) of banks deposits at Federal Reserve Banks for one business day at a specified rate of interest.” The purpose of transactions in this market is to adjust the reserves of banks; and the supply of funds to the market arises out of the reserves of banks with the central banking system. Supply of federal funds arises because some member banks have reserves on a given day in excess of reserve requirements.

Demand for funds arises because other member banks have reserve deficit on the same day. The federal funds market afford the bankers maximum degree of flexibility in adjusting their reserve positions so as to come out with a minimum of average daily excess reserves over the course of reserve averaging period. The maturity period of funds is one day. There appears to be a difference of opinion with regard to the participants in the market.

From the account of Monhollon, while one gets the impression that the transactions are among the member banks alone, Sayers thinks that demand for federal funds is a demand by banks and dealers in government securities; the supply of federal funds is mainly by banks but dealers in government securities and agents of foreign supply banks may also occasionally supply funds to this market.

The call loan market in the U.S. performs a different and specific function. The call loans “represent short term loans by banks to security brokers and dealers for the purpose of financing their customers purchases of common stock.” Banks’ loans to dealers in government securities also form part of the call loans. These loans are secured loans and the call provision allows the termination of the loan by either the lender or borrower on one day’s notice. The term “call loans” as it is understood in the U.S. does not include customer borrowings from security brokers, although these later borrowings are also on a call basis. Similarly, dealers in securities obtain loans from non-financial corporations, miscellaneous lenders such as state and local government, foreign institutions and insurance companies. Only dealer loans from banks are included under call loans.

In short, in the U.S, the call money market comprises an inter –bank call market, and the market between banks on the one hand and security brokers and dealers on the other. Because of the greater sophistication and a finer division of functions and institutional arrangements, different specialized markets are known by different names.

In the U.K. the call money market consists of three parts:
(a) clearing banks’ loans to discount houses
(b) inter-bank loans
(c) Mobilizations of surplus money by discount houses among themselves before they approach the Bank of England for financial accommodation.


Between the Bank of England and commercial banks, the existence of an intermediary in the form of discount houses is a peculiar organizational feature of the British money market.

Commercial banks give loans to discount houses on call basis. These loans are normally repayable when demanded. They are mostly secured loans, being secured against treasury bills or other basis of exchange as collateral. Commercial banks regard these loans as highly liquid because they know that discount houses can repay them when called, as the latter have an access to the Bank of England.

Discount houses use call loans for holding bills of exchange, treasury bills and other short-term government paper. Commercial banks are able to settle inter-bank indebtedness daily without impairing their cash ratios by manipulation of their call loans to the discount houses. In other words, call loans in the U.K. help banks in their reserve adjustment process as the federal funds do in the U.S. however, there is this difference that while in the U.S. the transactions are between banks, in the U.K. they are between clearing banks and discount houses.

Apart from the borrowings from banks, discount houses bid for marginal funds among themselves before they resort to the discount window at the Bank of England. According to Sayers, this market for funds among discount houses is somewhat similar to the federal funds market in the U.S.

Inter-bank call market in the U.K. developed in the 1960s, particularly after 1964. This is a market for lendings and borrowings between Scottish banks, merchant banks, British overseas banks, and foreign banks – all outside the clearing banks that are the major commercial banks in the U.K. The clearing banks do not participate in this market. Unlike call loans to discount houses, inter-bank loans are unsecured.

These loans may be simply overnight loans or they may be for a period of 6 months, but, generally, they are only for a few days. The transactions in this market are usually, but nit always, arranged by brokers. This market has some similarity with the federal funds market in the U.S., although the scope of the former is relatively much more restricted because the major commercial banks in the country do not participate in that market.

In India there are no separate short-term money markets of the types that have been discussed above. Call loans in India are given:
• To the bill market,
• For the purpose of dealing in the bullion markets and stock exchanges,
• Between the banks, and
• Frequently to individuals of high financial status in Mumbai for ordinary trade purposes in order to save interest on cash credits and overdrafts.

Among these uses, inter-bank use has been the most significant and their use on stock exchanges and other markets has been modest. Over a period of time, non-inter-bank uses of call money have further declined in relation to inter-bank transactions. Banks borrow from other banks in order to meet a sudden demand for funds, large payments, large remittances, and to maintain cash or liquidity with the RBI.

Thus, to the extent that call money is used in India for the purpose of adjustment of reserves, it is similar to federal funds in the U.S.; to the extent that call loans are given to security brokers they are similar to call loans proper in the U.S.; to the extent that call call money is traded among banks, it is similar to the “outside” inter-bank loans in the U.K. As there are no discount houses in India, there is no parallel in India to the loans between commercial banks and discount houses in the U.K.

Until March 1978, transactions in the call money market were usually effected through brokers. Each day these brokers obtained information about money on offer and money demanded, and then effected the transactions. Since then, however, the RBI has prohibited banks paying brokerage in the call money market as it has stopped payment of brokerage on deposits.

As was indicated earlier, call loans in India have maturity anywhere between 1 day to a fortnight. Money at call and short-notice in the balance sheets of commercials is a highly liquid asset. Unlike in other countries, call loans in India are unsecured. It is well known that money and credit situation in India every year is subject to seasonal fluctuations. Unlike in other countries, transactions or trading on the call money market is also believed to be characterized by seasonal variations. The seasonal ups and downs are believed to be reflected in the volume of money at call and short-notice , and call money rates at different times of the year.

The seasonal nature of the call money market would be reflected in 2 indicators:
• A decline in money at call and short notice should be greater in the slack season than in the busy season of a given year,
• An increase in money at call and short notice should be greater in the busy season than in the slack season.

The need for call money borrowings is the highest around March every year that may be due to withdrawals of deposits in March to meet year-end tax payments and withdrawals of funds by financial institutions to meet their statutory obligations. Call money borrowings tend to increase when there is an increase in the CRR.
Advertisements

Friends: (0)
Reply With Quote
Re: Call Money Market
Old
 (2 (permalink))
Rose Marry
rosemarry2 is an unknown quantity at this point
 
rosemarry2
Management Paradise Guru
Status: Offline
Posts: 2,125
Join Date: Apr 2016
Re: Call Money Market - April 13th, 2016

Quote:
Originally Posted by sunandaC View Post
Call money market is that part of the national money market where day to day surplus funds, mostly of banks are traded in. the loans made in this market are of a short term nature, their maturity varying between one day to a fortnight. As these loans are repayable on demand and at the option of either the lender or the borrower, they are highly liquid, their liquidity being exceeded only by cash.

Before discussing various aspects of the call money market in India, it is necessary to remember that the nature of this market varies in different countries. But all have a common feature that they deal; in loans which have a very short maturity and are highly liquid. As R.S. Sayers has pointed out, “everywhere banks look in their assets for a nice combination of profit and liquidity and this leads to a considerable degree of similarity in balance sheet structures. The similarity cannot amount to uniformity because there is no uniform availability of assets for bankers in different countries.”

As the complexity of the call money market is usually lost sight of we will briefly discuss here the nature of this market in the U.S. and the U.K. and then it’s working in India.

In the U.S. there are two markets, which can be said to form the call money market:

(a) Federal funds market
(b) Call money market proper
A federal fund transaction is defined

“As any transaction between banks involving the purchase (borrowing) or sale (lending) of banks deposits at Federal Reserve Banks for one business day at a specified rate of interest.” The purpose of transactions in this market is to adjust the reserves of banks; and the supply of funds to the market arises out of the reserves of banks with the central banking system. Supply of federal funds arises because some member banks have reserves on a given day in excess of reserve requirements.

Demand for funds arises because other member banks have reserve deficit on the same day. The federal funds market afford the bankers maximum degree of flexibility in adjusting their reserve positions so as to come out with a minimum of average daily excess reserves over the course of reserve averaging period. The maturity period of funds is one day. There appears to be a difference of opinion with regard to the participants in the market.

From the account of Monhollon, while one gets the impression that the transactions are among the member banks alone, Sayers thinks that demand for federal funds is a demand by banks and dealers in government securities; the supply of federal funds is mainly by banks but dealers in government securities and agents of foreign supply banks may also occasionally supply funds to this market.

The call loan market in the U.S. performs a different and specific function. The call loans “represent short term loans by banks to security brokers and dealers for the purpose of financing their customers purchases of common stock.” Banks’ loans to dealers in government securities also form part of the call loans. These loans are secured loans and the call provision allows the termination of the loan by either the lender or borrower on one day’s notice. The term “call loans” as it is understood in the U.S. does not include customer borrowings from security brokers, although these later borrowings are also on a call basis. Similarly, dealers in securities obtain loans from non-financial corporations, miscellaneous lenders such as state and local government, foreign institutions and insurance companies. Only dealer loans from banks are included under call loans.

In short, in the U.S, the call money market comprises an inter –bank call market, and the market between banks on the one hand and security brokers and dealers on the other. Because of the greater sophistication and a finer division of functions and institutional arrangements, different specialized markets are known by different names.

In the U.K. the call money market consists of three parts:
(a) clearing banks’ loans to discount houses
(b) inter-bank loans
(c) Mobilizations of surplus money by discount houses among themselves before they approach the Bank of England for financial accommodation.


Between the Bank of England and commercial banks, the existence of an intermediary in the form of discount houses is a peculiar organizational feature of the British money market.

Commercial banks give loans to discount houses on call basis. These loans are normally repayable when demanded. They are mostly secured loans, being secured against treasury bills or other basis of exchange as collateral. Commercial banks regard these loans as highly liquid because they know that discount houses can repay them when called, as the latter have an access to the Bank of England.

Discount houses use call loans for holding bills of exchange, treasury bills and other short-term government paper. Commercial banks are able to settle inter-bank indebtedness daily without impairing their cash ratios by manipulation of their call loans to the discount houses. In other words, call loans in the U.K. help banks in their reserve adjustment process as the federal funds do in the U.S. however, there is this difference that while in the U.S. the transactions are between banks, in the U.K. they are between clearing banks and discount houses.

Apart from the borrowings from banks, discount houses bid for marginal funds among themselves before they resort to the discount window at the Bank of England. According to Sayers, this market for funds among discount houses is somewhat similar to the federal funds market in the U.S.

Inter-bank call market in the U.K. developed in the 1960s, particularly after 1964. This is a market for lendings and borrowings between Scottish banks, merchant banks, British overseas banks, and foreign banks – all outside the clearing banks that are the major commercial banks in the U.K. The clearing banks do not participate in this market. Unlike call loans to discount houses, inter-bank loans are unsecured.

These loans may be simply overnight loans or they may be for a period of 6 months, but, generally, they are only for a few days. The transactions in this market are usually, but nit always, arranged by brokers. This market has some similarity with the federal funds market in the U.S., although the scope of the former is relatively much more restricted because the major commercial banks in the country do not participate in that market.

In India there are no separate short-term money markets of the types that have been discussed above. Call loans in India are given:
• To the bill market,
• For the purpose of dealing in the bullion markets and stock exchanges,
• Between the banks, and
• Frequently to individuals of high financial status in Mumbai for ordinary trade purposes in order to save interest on cash credits and overdrafts.

Among these uses, inter-bank use has been the most significant and their use on stock exchanges and other markets has been modest. Over a period of time, non-inter-bank uses of call money have further declined in relation to inter-bank transactions. Banks borrow from other banks in order to meet a sudden demand for funds, large payments, large remittances, and to maintain cash or liquidity with the RBI.

Thus, to the extent that call money is used in India for the purpose of adjustment of reserves, it is similar to federal funds in the U.S.; to the extent that call loans are given to security brokers they are similar to call loans proper in the U.S.; to the extent that call call money is traded among banks, it is similar to the “outside” inter-bank loans in the U.K. As there are no discount houses in India, there is no parallel in India to the loans between commercial banks and discount houses in the U.K.

Until March 1978, transactions in the call money market were usually effected through brokers. Each day these brokers obtained information about money on offer and money demanded, and then effected the transactions. Since then, however, the RBI has prohibited banks paying brokerage in the call money market as it has stopped payment of brokerage on deposits.

As was indicated earlier, call loans in India have maturity anywhere between 1 day to a fortnight. Money at call and short-notice in the balance sheets of commercials is a highly liquid asset. Unlike in other countries, call loans in India are unsecured. It is well known that money and credit situation in India every year is subject to seasonal fluctuations. Unlike in other countries, transactions or trading on the call money market is also believed to be characterized by seasonal variations. The seasonal ups and downs are believed to be reflected in the volume of money at call and short-notice , and call money rates at different times of the year.

The seasonal nature of the call money market would be reflected in 2 indicators:
• A decline in money at call and short notice should be greater in the slack season than in the busy season of a given year,
• An increase in money at call and short notice should be greater in the busy season than in the slack season.

The need for call money borrowings is the highest around March every year that may be due to withdrawals of deposits in March to meet year-end tax payments and withdrawals of funds by financial institutions to meet their statutory obligations. Call money borrowings tend to increase when there is an increase in the CRR.
Hey Sunanda,

Here I am uploading Study on Money Market Operations, so please download and check it.
Attached Files
File Type: pdf Study on Money Market Operations.pdf (215.0 KB, 0 views)
Friends: (0)
Reply With Quote
Reply

Bookmarks

Tags
call, market, money
Related to Call Money Market
 

Similar Threads

Thread Thread Starter Forum Replies Last Post
CALL MONEY MARKET nupur_sweetu Financial Management ( FM ) 7 April 18th, 2016 06:03 PM
call money market ppt waquarahmad Export - Import Procedures 7 July 13th, 2015 06:27 PM
Call Money Markets nagu_chou Financial Markets 10 June 24th, 2015 09:21 PM
money market and capital market Kalpna Nadar Financial Markets 12 March 11th, 2011 02:27 AM
Money market and capital market instruments pari.arveen Financial Management 0 February 13th, 2010 04:17 PM
 


Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is On
Trackbacks are On
Pingbacks are On
Refbacks are Off


ManagementParadise.com is not responsible for the views and opinion of the posters. The posters and only posters shall be liable for any copyright infringement.



Search Engine Optimization by vBSEO ©2011, Crawlability, Inc.