Financial Instruments

Major sources of bank funds have changed in the past thirty years. This is due directly to the Federal Reserve’s Regulation Q, which places ceiling limits on deposit rates. Banks would increase competition by offering higher interest rates than another bank. To keep bank deposit transactions stable, Regulation Q was imposed. Also, interest rates on assets increased greatly during this time. Individuals and business firms then, as a result, are willing to hold only …

…transactions deposits and savings accounts to be withdrawn at any time. Business firms being too liquid would be risky for the business, and in addition, other business firms do not specialize solely in the business of money like banks do. Business firms are set up to make profit from business operations based on service or the sale of merchandise, whereas banks are set up to serve as intermediaries for money, or financial institutions of money.