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Chapter 9 The Business Of Banking

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ECON 2035
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Chapter 9The Business of BankingSECTION91BANKSBALANCESHEETSBalance sheet Financial statement that summarizes an entitys assets liabilities and net worth at a given dateBasicaccountprinciplethatassetsliabilitiesnetworthoThesumofallassetsmustequalthesumofallliabilitiesandnetworth oLiabilities amounts of money owed to othersoNet worth equitycapital difference between assets and liabilities LearningTip Rememberthetermsnetworthequityandcapitalareallusedinterchangeablyinthiscontext LearningTipAgeneralwaytothinkaboutthetwosidesofthesheetisabalancebanksliabilitiesandcapitalareitssourceoffundsanabanksassetsareitsusesoffunds Liabilitiesandcapital right side of balance sheetMaincategories oChecking demand depositsgenerallynointerest does cost bank to have account pay oNontransactiondeposits includesavingsdepositssmalltimedepositsless than 1000 andlargetimedeposits more than 1000 do pay interest rates 23 of all deposits oBorrowings generally includefederalfundsrepurchaseagreementsbondsanddiscountloans and capital Federal funds loans from one bank to another Repurchase agreement repo sale of a security with a promise to buy it back at a higher price on a future dateoOther liabilitiesincludetaxesduetothegovernmentanddividendsthatareduetobepaidtothebanksshareholders Assets left side of balance sheet MaincategoriesoCashitemsincludereservesandcashitemsinprocessofcollectionVault cash currency in banks branches and ATMs Reserves vault cash plus banks deposits at the Federal ReserveBanks can have deposits at another bank In process if collection point in time when fed collects money and bank collects money oSecurities loansthatthebankhasgivenout Banks have securities to have money Usually government bonds oOthermiscellaneousassetsincludeanycollateralseizedfromdefaultedloansandthevalueofabanksbuildingandequipment LearningTipRememberthatabanksreservesarethesumofitsvaultcashandthedepositsthe atbankhas theFed SECTION92OFFBALANCESHEETACTIVITIESOffBalanceSheet OBS activities bank activities that produce income but are not reflected in the assets and liabilities reported on the balance sheet Any fee provided as a service from the bankMaincategoriesofoffbalancesheetactivitieslinesofcreditlettersofcreditassetmanagementderivativesandinvestmentbanking oLineofcredit givesaborrowerarighttoborrowuptoacertainamount BorrowerpaysafeeforthisrightThelineofcreditdoesnotaffectthebalancesheetuntiltheborrowertakesoutaloanontheline oLetter of credit a banks guarantee in return for a fee of a payment promised by a firm
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