Definition:

Federal Funds Sold & Securities Purchased refer to short-term loans or securities transactions made by financial institutions, typically banks, to other banks or financial institutions. These transactions are part of the interbank lending market, where banks with excess reserves lend to those with deficits, usually on an overnight basis.

Examples:

1. A bank with excess reserves lends $5 million to another bank overnight at the federal funds rate.
2. A financial institution purchases Treasury securities from another bank with an agreement to sell them back the next day.

Formula:

There is no specific formula for Federal Funds Sold & Securities Purchased, as they are transactional activities rather than calculated metrics. However, they can be represented in financial statements as:

Federal Funds Sold = Total amount of funds lent to other banks

Securities Purchased = Total value of securities bought under agreements to resell

How to use the metric:

These metrics are used to assess a bank's liquidity management and its involvement in the interbank lending market. They provide insights into how a bank manages its short-term funding needs and excess reserves.

Limitations:

1. They are short-term and may not reflect the long-term financial health of an institution.
2. The metrics can fluctuate significantly, making it difficult to draw conclusions from a single data point.
3. They are influenced by external factors such as monetary policy and market conditions.

Applies to:

Primarily applies to the banking and financial services industry, where institutions engage in interbank lending and securities transactions as part of their liquidity management strategies.

Doesn't apply to:

Non-financial industries, such as manufacturing or retail, as these sectors do not typically engage in interbank lending or securities transactions for liquidity management.

Summary:

Federal Funds Sold & Securities Purchased are key components of the interbank lending market, reflecting a bank's short-term liquidity management activities. While useful for understanding a bank's immediate financial strategies, they are limited by their short-term nature and susceptibility to external influences. These metrics are most relevant to the banking and financial services industry.