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What is the main source of funds for a commercial bank, and the main use of those funds?
ACustomer deposits, used mainly to make loans
BShare capital, used mainly to buy fixed assets
CCentral bank loans, used mainly to buy bonds
DService fees, used mainly to pay staff salaries
Answer & Solution
Correct answer: A. Customer deposits, used mainly to make loans
1. Customer deposits are the major source of funds for a commercial bank.
2. The main use of those funds is loans.
3. This is why the bank cares about both the interest it pays depositors and the interest it earns from borrowers.
4. Borrowing from the central bank happens only when that is the cheaper source, so it is an occasional top up rather than the main source.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 15 "Understanding Money and Financial Institutions", section 15.3 U.S. Financial Institutions_
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