Money-at-Call: What it Means, How it Works

What is Money-at-Call?

Money-at-call is a short-term, interest-earning loan that the borrower must repay immediately when the lender demands.

Key Takeaways

• Money-at-call is a short-term, interest-earning loan that the borrower must repay immediately when the lender demands.
• Money-at-call allows banks to earn interest, known as the call-loan rate, while maintaining liquidity and is the most liquid asset on their balance sheet after cash.
• Besides generating interest, money-at-call is valuable for banks in profiting from surplus funds and maintaining proper liquidity levels.

Understanding Money-at-Call

Money-at-call, also known as call money or "at call money," is a financial loan payable immediately and in full when demanded by the lender, usually a bank. It’s a short-term, interest-paying loan from one to 14 days provided by a financial institution to another. Unlike longer-term loans, money-at-call doesn’t involve regular principal and interest payments.

Typical money-at-call loans lack repayment schedules, and the interest rate is called the call-loan rate. Money-at-call enables banks to earn interest while maintaining liquidity, and it’s the most liquid asset on their balance sheet after cash. Investors may use money-at-call for margin account coverage.

Money-at-call markets involve banks, Primary Dealers (PDs), development finance institutions, insurance companies, and select mutual funds. Banks and PDs can both borrow and lend in the market. A bank might need money-at-call funding when the difference in the maturity of their rate-sensitive assets and liabilities creates a funding gap.

Money-at-call is different from "short notice money," which is similar but doesn’t require immediate payment when called. Instead, the lender has a time range of up to 14 days to repay the loan. "Short notice money" is also a liquid asset but less liquid than cash and money-at-call. Besides generating interest, the true value of money-at-call for banks is in profiting from surplus funds and maintaining proper liquidity levels.

Money-at-call plays a vital role in the money markets. It has special features, serving as an extremely short-term funds management vehicle, easily reversible transaction, and a means to manage a balance sheet. Transaction costs are low since it’s executed bank-to-bank without a broker. It helps smooth fluctuations and contributes to maintaining required liquidity and reserves. Additionally, it allows banks to hold a higher reserve-to-deposit ratio, enhancing efficiency and profitability.

Other Types of Money-at-Call

Various financial instruments can be "called" or declared payable immediately. Banks can call their short-term loans. However, many money-at-call instruments can be called by the borrower. The most notable example is a callable bond.

Several types of bonds can be called or required to be redeemed before maturity, as specified in the bond’s indenture and prospectus. These bonds may have a non-callable period and then become callable for the remaining bond life. For instance, a 30-year bond might have a 10-year call feature, becoming callable after 10 years. Typically, the bondholder receives a premium above the bond’s par value, or face value.

Other fixed-income securities, like certificates of deposit, may also have call features. Even common and preferred stock may have call features, offering companies the option to repurchase shares at a specific price.

How Money at Call Works

For example, brokerage Firm A intends to buy shares of Company X for their client on margin, with payment due in 12 days. To cover the share purchase costs, Firm A borrows money-at-call from Bank XYZ, confident in their client’s ability to pay. Bank XYZ doesn’t establish a payment schedule but reserves the right to call the loan at any time since Firm A expects a quick transaction. If Bank XYZ calls the loan before 12 days, Firm A can collect the money by issuing a margin call to their client.