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Explain whether you believe banks' participation in the fed funds market is beneficial or not. Are...

Explain whether you believe banks' participation in the fed funds market is beneficial or not. Are there better alternatives?

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Answer #1

I believe banks participating in fed funds market is beneficial. Fed fund market is a market where all banks provide short term liquidity to each others. This is done so as to maintain reserve ratios set by federal bank. Thus if a bank shortfall reserves then he borrows from other banks and repays them in a short period of time. It is beneficial because sometimes there are delays in payments to be received to banks or other case .

This system also keeps required capital in range which is set by federal bank. This ensures safety of economy.

I don't believe any other better alternative exists.

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