Final answer:
Local banks benefit from stand-by credit as it allows them to provide loans without needing large capital reserves. Stand-by credit can help in significant purchases and in building a credit score, which is essential for borrower credibility. Bank account funds offer high liquidity and are FDIC insured for customer protection.
Step-by-step explanation:
Advantages of Stand-by Credit for Financing
Stand-by credit offers several benefits for financing, particularly for local banks. One significant advantage is that a bank does not need to have substantial extra funds to make a loan, because the loan is intended to be held only for a brief period before it's sold and pooled into a financial security. This flexibility in financing allows banks to provide loans without the need for large capital reserves. Furthermore, in the broader financial capital market, several measures such as credit checks, co-signers, and collateral are taken to ensure the bank's safety in lending.
Moreover, stand-by credit can act as an emergency fund, although it must be used carefully. It helps purchase significant items like an automobile, especially for first-time buyers. Responsible use of stand-by credit can be advantageous, as it contributes to the credit score, signifying the borrower's credibility and capability to repay debts. Credit scores are crucial for lenders to assess the risk before lending money.
Lastly, funds in bank accounts offer high liquidity and security, emphasized by the protection through the Federal Deposit Insurance Corporation (FDIC), which guarantees customer deposits up to $250,000 in case a bank goes bankrupt. Therefore, stand-by credits enhance a bank's lending capability without compromising its financial stability or necessitating large cash reserves.