Deposit Pricing and Repurchase Agreements
The separation theorem discussed in Chapter 10 allows the separation of the deposit and loan pricing decisions. Each one must be evaluated based on the interbank market rate. This is convenient because it allows bank managerial issues to be discussed one after the other. In this chapter, several tools that are useful for deposit pricing are covered first. Next, an alternative source of funds, the repurchase-agreement (repo) market, is introduced. A discussion of loan pricing and loan-loss provisions will follow in subsequent chapters.