What is Call Money?
Call money, also known as "money at call," is a short-term financial loan that is payable immediately, and in full, when the lender demands it. Unlike a term loan, which has a set maturity and payment schedule, call money does not have to follow a fixed schedule, nor does the lender have to provide any advanced notice of repayment.
Understanding Call Money
Call money is a short-term, interest-paying loan from one to 14 days made by a financial institution to another financial institution. Due to the short term nature of the loan, it does not feature regular principal and interest payments, which longer-term loans might. The interest charged on a call loan between financial institutions is referred to as the call loan rate.
- Call money is any type of short-term, interest-earning financial loan that the borrower has to pay back immediately whenever the lender demands it.
- Call money allows banks to earn interest, known as the call loan rate, on their surplus funds.
- Call money is typically used by brokerage firms for short-term funding needs.
Brokerages use call money as a short-term source of funding to maintain margin accounts for the benefit of their customers who wish to leverage their investments. The funds can move quickly between lenders and brokerage firms. For this reason, it is the second most liquid asset that may appear on a balance sheet, behind cash.
If the lending bank calls the funds, then the broker can issue a margin call, which will typically result in the automatic sale of securities in a client's account (to convert the securities to cash) in order to make the repayment to the bank. Margin rates, or the interest charged on the loans used to purchase securities, vary based on the call money rate set by banks.
Advantages and Disadvantages of Call Money
Call money is an important component of the money markets. It has several special features, as an extremely short period funds management vehicle, as an easily reversible transaction, and as a means to manage the balance sheet.
Dealing in call money allows banks the opportunity to earn interest on surplus funds. On the counterparty side, brokerages understand that they are taking on additional risk by using funds that can be called at any time, so they typically use call money for short-term transactions that will be resolved quickly.
The transaction cost is low, in that it is done bank-to-bank without the use of a broker. It helps to smooth the fluctuations and contributes to the maintenance of proper liquidity and reserves, as required by banking regulations. It also allows the bank to hold a higher reserve-to-deposit ratio than would otherwise be possible, allowing for greater efficiency and profitability.
Call Money vs. Short Notice Money
Call money and short notice money are similar, as both are short term loans between financial institutions. Call money must be repaid immediately when called by the lender. Alternatively, short notice money is repayable up to 14 days after notice is given by the lender. Short notice money is also considered to be a highly liquid asset, trailing cash and call money on the balance sheet.