CHAPTER%209 - The Bank Balance Sheet Basic Banking Bank...

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Unformatted text preview: The Bank Balance Sheet Basic Banking Bank Management Credit Risk Interest Rate Risk Off-Balance-Sheet Activities CHAPTER 9 Banking and The Management of Financial Institutions The Bank Balance Sheet Basic Banking Bank Management Credit Risk Interest Rate Risk Off-Balance-Sheet Activities Banking Banks provide over $6 trillion in credit annually in the US. How do banks manage their assets an liabilities? How do banks earn income? The balance sheet : list of assets and liabilities. Total Assets = Total Liabilities + Capital Bank liabilities contained in monetary aggregates (M1/M2). The Bank Balance Sheet Basic Banking Bank Management Credit Risk Interest Rate Risk Off-Balance-Sheet Activities The Bank Balance Sheet Basic Banking Bank Management Credit Risk Interest Rate Risk Off-Balance-Sheet Activities Bank Liabilities In order of decreasing liquidity: 1. 7% Checkable Deposits : non-interest bearing demand deposits, interest bearing NOW accounts, money market deposit accounts 2. 59% Nontransaction Deposits : savings accounts, time deposits (small and large certificates of deposits (CDs)) 3. 26% Borrowings : Discount loans (advances) from the Fed, loans from other banks in the Federal Funds market, Eurodollars, ... 4. 8% Bank Capital : banks net worth (Assets - Liabilities): equity or retained earnings The Bank Balance Sheet Basic Banking Bank Management Credit Risk Interest Rate Risk Off-Balance-Sheet Activities Bank Assets In order of decreasing liquidity: 1. 4% Reserves and Cash items Reserves : deposits at the Fed, vault cash Required reserves: to meet regulatory requirements Excess reserves: to face withdrawals by depositors Cash Items in Process of Collection (uncleared checks), Deposits at other banks (correspondent banking) 2. 23% Securities : debt instruments only: US government (federal, local) and other securities, secondary reserves 3. 66% Loans : commercial and industrial, real estate, consumer, interbank 4. 7% Other assets : Physical Capital The Bank Balance Sheet Basic Banking Bank Management Credit Risk Interest Rate Risk Off-Balance-Sheet Activities Basic Banking: Cash Deposit First National Bank Assets Liabilities Reserves (Vault Cash) Checkable Deposits + $ 100 + $ 100 Opening of a checking account leads to an increase in the banks reserves equal to the increase in checkable deposits The Bank Balance Sheet Basic Banking Bank Management Credit Risk Interest Rate Risk Off-Balance-Sheet Activities Basic Banking: Check Deposit First National Bank Assets Liabilities Cash items in process of collection Checkable Deposits + $ 100 + $ 100 When a bank receives additional deposits, it gains an equal amount of deposits; when it loses deposits, it loses an equal amount of reserves....
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This note was uploaded on 10/08/2008 for the course ECON 3310 taught by Professor Davis during the Fall '07 term at Cornell University (Engineering School).

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CHAPTER%209 - The Bank Balance Sheet Basic Banking Bank...

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