Participants in the money markets

The major players in the money market are:

• banks
• corporates
• brokers
• central authorities 

Banks

Banks and other financial intermediaries provide the means by which funds are transferred from one entity to another.

Banks are involved in the money market through their dealing rooms. These rooms are staffed by dealers who trade in the various money market instruments by quoting prices to each other, to investors, and to corporations. However, prices are usually quoted to other banks through money brokers.
Banks deal with
1. Corporates
2. Other banks
3. Investors

Bank limits
Transactions in the money markets between banks and financial intermediaries are usually carried out through interbank market, without backing of any specific security. This is known as full faith and credit. Trust and confidence are vital in these transactions.
Banks have some limits according to which it borrow, lend, buy or sell. These limits are determined by :

• balance sheet 
• solvency
• liquidity
• profitability
• sovereign risk 

Balance sheet are v.important for insuring security and credit of any corporation but especially banks when they deal with Central banks.
Solvency - Solvency measures the amount of borrowed capital used by the business relative the amount of owner’s equity capital invested in the business. In other words, solvency measures provide an indication of the business’ ability to repay all indebtedness if all of the assets were sold. Solvency measures also provide an indication of the business’ ability to withstand risks by providing information about the farm’s ability to continue operating after a major financial adversity.
A firm with insufficient assets to meet liabilities is termed insolvent.

Liquidity measures the ability of the farm business to meet financial obligations as they come due, without disrupting the normal, ongoing operations of the business. Liquidity can be analyzed both structurally and operationally. Structural liquidity refers to the balance sheet (assets and liabilities) and operational liquidity refers to cash flow measures.

Two recommended measures of liquidity are the current ratio and working capital. The current ratio measures the relationship between total current farm assets and total current farm liabilities and is a relative measure rather than an absolute dollar measure. The higher the ratio, the more liquid the farm is considered to be.
Working capital is a measure of the amount of funds available to purchase inputs and inventory items after the sale of current farm assets and payment of all current farm liabilities. Working capital is expressed in absolute dollars; therefore, determining adequate working capital is related to the size of the farm operation.

Solvency vs liquidity 
Unlike liquidity, solvency is concerned with long-term as well as short-term assets and liabilities. Solvency measures evaluate what would happen if all assets were sold and converted into cash and all liabilities were paid. The most straightforward measure of solvency is owner equity, using the market value of assets and including deferred taxes in the liabilities. As with working capital, adequacy of equity depends on business size, making comparisons difficult without using ratios.
Three widely used financial ratios to measure solvency are the debt-to-asset ratio, the equity-to-asset ratio and the debt-to-equity ratio. These three solvency ratios provide equivalent information, so the best choice is strictly a matter of personal preference.
The debt-to-asset ratio expresses total farm liabilities as a proportion of total farm assets. The higher the ratio, the greater the risk exposure of the farm.
The equity-to-asset ratio expresses the proportion of total assets financed by the owner’s equity.
The debt-to-equity ratio reflects the capital structure of the farm and the extent to which farm debt capital is being combined with farm equity capital. It is a measure of the degree to which a farmer is leveraging his equity.

 Profitability measures the extent to which a business generates a profit from the factors of production: labor, management and capital. Profitability analysis focuses on the relationship between revenues and expenses and on the level of profits relative to the size of investment in the business. See more on profitability.

Sovereign risk Some firms carry risks beyond their intrinsic credit risk, due to where they are based. If the firm lies in an unstable political and economic environment, this can affect its ability to meet liabilities.

Bank & Market Rates

Banks 'take a view' on the market. This is the bank's perception of market rate movements, taking current and possible future circumstances into account. The bank's dealers then act according to this view. Banks also need to balance their books and may find themselves with a deficit or surplus like any other corporation. They then need to manage these exposures in the money markets.

Banks' borrowing and lending practices follow a pattern. In a normal interest rate environment, banks usually borrow short and lend long. This means that they try to borrow whatever money they require over a short time span and lend it over a longer time period. In this way, they are often able to gain maximum advantage from existing market conditions by borrowing at lower interest rates than those at which they lend.


Corporates

Corporations (commercials) are involved in the money market, usually through their banks, either to lend or borrow money. As we have said, corporations may find that they have a temporary shortfall and the money market not only provides a way to cover this, but also an opportunity to profit from a surplus.

The money market also provides corporations with access to funds when required. When a corporation wants to borrow or lend money to banks, the corporation – usually through the corporate treasury or finance department – contacts dealers in various banks and strikes the best deal available.


Corporate Dealings with Banks

A corporation will deal with a bank's dealing room, lending department or corporate relations department, depending on the size of the firm and the size of the transactions. Remember, money market dealers work in a wholesale market.

There is also an increasing use of bank to customer dealing systems to automate customer transactions, thereby making the process more efficient and freeing up the time of the dealer.

Borrowing from banks is not the only way corporations may raise money to clear a deficit in the short-term. They can take advantage of various money market instruments, such as commercial paper. The means by which corporations borrow, varies from country to country.

Brokers 
Brokering functions
Most brokering functions occur when buying , selling, lending, borrowing of funds occur between 2 parties.
Central Banks

The central authority is a government created agency. In most countries, the central authority is known as the central bank.

Notable exceptions to the use of the title of central bank are:
UK - the Bank of England
US - the Federal Reserve (the 'Fed')
India - Reserve Bank of India ( RBI )


The primary objective of the central authority is to help create stable financial conditions in the country. To achieve this, the central authority is a participant on the domestic money market where its major impact is felt by commercial banks. It may also participate in the international money market. In the case of member states of the euro area, this responsibility is assigned to the European Central Bank (ECB).

Typical  Central bank 
Central bank is responsible for the monetary policy of the country. Its primary responsibility it is the stability of the currency and money supply. It has following funtions:
1. Supervision of the banking system

2. Advising the government on monetary policy

3. Issue of banknotes

4. Acting as banker to other banks

5. Acting as banker to government

6. Raising money for the government

7. Controlling the nation’s currency reserves

8. Acting as “ lender of last resort”

9. Liaising with international bodies

Central bank Activity 
Central Banks & the Exchange Rate

The central authority can also influence the exchange rate of the domestic currency on the FX market by intervening openly in the buying and selling of that currency. The central authority will seek to have the real value of its currency reflected accurately in the FX market. If it thinks this is not the case, it will intervene in the market if it feels this intervention will be effective in achieving the desired result.

This can be achieved by intervening directly in the FX markets or by adjusting the domestic interest rate to make investing in the currency look more or less attractive.