OHCh9 - Chapter 9: Banking and the Management of Financial...

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Chapter 9: Banking and the Management of Financial Institutions
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1 The Bank Balance Sheet beginequation total asset = total liabilities + capital endequation See Table 1 in Mishkin’s textbook. 1.1 Liabilities A bank acquires funds by issuing liabilities, such as deposits, which are the sources of funds the bank uses. Checkable Deposits
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Nontransaction Deposits Borrowings Banks also obtain funds by borrowing from the Federal Reserve System (Fed) and other banks. Borrowing from the Fed are called discount loans Borrowing from other banks overnight are done in the federal funds market Bank Capital Bank capital is the bank’s net worth.
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1.2 Assets Reserves Reserves are deposits in an account at the Fed plus vault cash (cur- rency that is physically held by banks). Reserves currently do not pay any interest, but banks hold them for two reasons. { required reserves A certain fraction (called the required reserve ratio ) of checkable deposits must be kept as reserves. { excess reserves These are used when funds are withdrawn. Securities Debt instruments. The U.S. commercial banks are not al- lowed to hold stock. Short-term U.S. government securities are called
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secondary reserves . Loans 2 Basic Banking Asset transformation: of characteristics (a particular combination of liquidity, risk, size, and return and using the proceeds to buy assets with a di±erent set of characteristic.
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T-account: changes that occur in balance sheet items starting from some initial balance sheet position. Jane Brown opens a checking account with a $100 bill at the First National Bank. Assets Liabilities Vault Cash +$100 Checkable deposits +$100 Vault cash is also part of the bank’s reserves: Assets Liabilities Reserves +$100 Checkable deposits +$100
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If the required reserve ratio is 10%, the First National Bank now has excess reserves of $90. The bank can make a loan of $90. Assets Liabilities Reserves +$10 Checkable deposits +$100 Loans +$90 3 General Principles of Bank Management liquidity management: The bank should be ready to meet deposit demand payment. The acquisition of su±ciently liquid assets to meet the bank’s obligations to depositors.
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asset management: The bank manager should pursue to diversify as- sets and obtain a good combination of assets with low risk and high expected return. liability management: The bank should acquire funds at low cost. capital adequacy management: The manager must decide the amount of capital that the bank should maintain and then acquire the needed capital. 3.1
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This note was uploaded on 07/17/2008 for the course ECON 520 taught by Professor Ogaki during the Spring '07 term at Ohio State.

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OHCh9 - Chapter 9: Banking and the Management of Financial...

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