Investment Policies

• Banks, savings & loans, credit unions, and other financial institutions are strictly regulated by the Federal Reserve and the FDIC as well as their individual state banking authorities. They are required to have written investment policies that set forth the types and amount of loans they will make, and the size of their investment portfolio and permissible investment types. OCC lists permissible investments as United States government obligations; various federal agency bonds; state, county, and municipal issues; special revenue bonds; industrial revenue bonds; and certain corporate debt securities that, first, provide safety; and, secondly, a relatively reasonable rate of return.
  
  

Investment Portfolio

• Bank investment portfolios emphasize short and intermediate term U.S. government, agency and high-quality corporate debt securities. The investment portfolio must contain securities that can be easily liquidated and which represent low credit and interest rate risk. Repurchase agreements backed by Treasury or Agency bonds, U.S. Treasury bills and notes maturing within two years, high-quality commercial paper, certificates of deposit, and bankers acceptances make up the majority of portfolio holdings. Longer term investments with maturities to five years make up the rest of the portfolio. Ten-year maturities are sometimes acceptable as are mortgage pass-through securities and other derivatives, but they are subject to limitations.
  
  

Reserve Requirements

• Reserve requirements may be satisfied by vault cash and deposits at the bank's regional branch of the FRB. These requirements range from 3 percent to 10 percent of a bank's net transaction accounts -- the deposit accounts that can be used for financial transactions by the customer. The FRB in October 2008 instituted payment of interest on reserve deposits. Previously, these deposits were held without interest.
  
  

Investment Process

• Bank investments are run out of the bank's treasury department by the asset/liability manager or portfolio manager, with oversight by the treasurer. Every morning the asset/liability manager receives a cash balance report that shows cleared deposits and withdrawals as well as future loan commitments and investment settlements. Overnight and short-date money is invested first, generally in repurchase agreements. Longer-term investments are considered during the day as bond brokers show in their inventories of short- and intermediate-term bonds.