Since the beginning of the Federal Reserve Bank’s open market operations in the 1920s and 30s, banks have been encouraged to lend money to one another to cover daily reserve requirements. Banks helping banks through this lending network created a healthy monetary resource for financial institutions across the country that continues to this day. The Federal Open Market Committee (FOMC) regulates the fed fund interest rate to either stimulate the economy or curb inflation.
In 2008, fed fund rates hit an all-time low at .25%. For the first time in history, the Federal Reserve Bank started paying interest on excess reserves through the excess balance account (EBA) program. The fed fund market shrunk and EBA accounts grew. Through the years, banks got comfortable with their lower-risk EBA and continued to invest their excess funds in EBA accounts without regard to their earnings.
BBOK offers multiple overnight fund options including both fed funds and EBA accounts allowing banks to use the solution that fits their risk appetite. Recently, banks are feeling more secure in the market and have enjoyed higher earnings on their funds invested with BBOK by shifting EBA investments to fed funds.
BBOK manages from $500M-$1B in our fed funds pool, selling to a diverse list of upstream banks ranging from large regional banks to mega banks. BBOK searches the market for highly rated upstream banks and distributes funds among a number of banks in the pool to help lessen the risk of undue concentration of funds, while providing a competitive return. Each upstream bank is required to meet qualifying standards with two independent rating services. The list of upstream banks is reviewed quarterly by the BBOK board of directors and can be accessed through the Bank Member Pages at bbok.com.
At the time of BBOK’s creation in the late 1980s, many banks had limited access to a borrowing line based on the economic conditions of the time. One of the key objectives from the beginning was to assist Kansas banks in acquiring funding. To this day, customers have the capability to borrow through an unsecured or secured line of credit. Unsecured lines are routinely reviewed and monitored by an internal downstream committee. Secured lines are backed by eligible securities pledged to BBOK.
The fed funds market plays a vital role in community banking. In our eyes, it is a network of banks helping banks make the system work.
To learn more, contact your relationship manager, Mike Ray or Tonya Rolo at 800.999.5725.