Class 9 - Econ 350 U.S. Financial Systems, Markets and...

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Econ 350 U.S. Financial Systems, Markets and Institutions Class 9 Econ 350 U.S. Financial Systems, Markets, and Institutions Class 9: Banking finances Greetings! In today’s class, we explore banking finances and the tools that help us to follow the flow of funds through the banking system. Specifically, we will look at the idea of a bank’s balance sheet, both for an individual bank and for the banking system as a whole. We define the concepts of assets and liabilities, and look at the components of each. We then examine how flows of funds and changes in a bank’s financial position are recorded in a bank’s balance sheet. To begin to understand the mechanics of monetary policy, we must first have an idea of how funds flow through the banking system. Course Objectives After today’s class, you should -- understand the concepts of assets, liabilities, and the bank’s balance sheet. -- know the components of a firm’s assets. -- know the components of a firm’s liabilities. -- be able to show how a deposit inflow or outflow affects a bank’s balance sheet. -- be able to show how open market operations affect a bank’s balance sheet. The Bank Balance Sheet The balance sheet starts with a simple identity: Net Worth = Assets – Liabilities This can be re-arranged to get: Assets = Liabilities + Net Worth This equation defines the two sides of a balance sheet. On the left side, assets are listed. On the right side, liabilities and net worth are listed. The table is called a balance sheet because the left and right sides must always balance, or be equal to each other. In banking parlance, net worth is often known as “capital”, “bank capital”, “equity capital”, or “equity”. Balance sheet: A record of financial position at a given point in time. On the left side assets are listed, and on the right side liabilities and bank capital are listed, where Assets = Liabilities + Bank Capital. It shows the uses and sources of bank funds. Assets: What you own. Property or financial instruments that are subject to ownership. Liabilities: What you owe. The financial claims on an institution. 74
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Econ 350 U.S. Financial Systems, Markets and Institutions Class 9 Bank capital: A bank’s net worth or equity, Bank Capital = Assets – Liabilities. A typical bank balance sheet For a typical U.S. commercial bank, the balance sheet looks something like this: Assets Liabilities Reserves Checkable deposits Vault cash Federal Reserve Account Non-transactions deposits small time deposits Cash items in process savings deposits of collection large time deposits Deposits at other banks Borrowings Federal Funds Securities Discount loans U.S. Treasury Other borrowing U.S. government agency Municipal Bank Capital Other (including Loan Loss Reserve) Loans Commercial and industrial Real estate Consumer Interbank Other loans Other assets (including physical capital) The major categories of bank assets include reserves and other cash, securities, loans, and physical capital. Liabilities include checking (transactions deposits) and savings
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This note was uploaded on 05/09/2009 for the course ECON 350 taught by Professor Christianson during the Spring '08 term at Binghamton University.

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Class 9 - Econ 350 U.S. Financial Systems, Markets and...

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