ECN 481 (6), The Banking Firm

ECN 481 (6), The Banking Firm - The Banking Firm Purpose of...

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The Banking Firm Purpose of Chapter -- Introduction to basic operations of the individual bank . Four types of Banks Commercial Banks Savings and Loans Savings Banks Credit Unions
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The Bank’s Balance Sheet              Assets          Liabilities + Equity Assets -- Market value of items in your possession. Liabilities -- Amounts owed to other parties. Equity = Assets - Liabilities
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Working With Assets, Liabilities, and Equity Note: Definition of equity implies: Assets = Liabilities + Equity (Balance sheets balance !).
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A Balance Sheet Example Consider a house that you buy worth $120,000. You take out a mortgage of $100,000.              Assets                 Liabilities + Equity       House $120,000   Mortgage $100,000                                 Equity       $20,000
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The Bank’s Major Liabilities and Equity (1) Checkable Deposits (D) Includes Demand Deposits, Negotiable Order of Withdrawal (NOW) Acounts, Automatic Transfer of Savings (ATS) Accounts, and MMDA Not a major source of funds for banks
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(2) Nontransactions Deposits (T) Includes Savings Deposits, and Small and Large Time Deposits (Negotiable CDs) Major source of funds for banks -- higher interest rate (cost), but less frequency/more predictability of withdrawal
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(3) Borrowings (BORR) -- Funds borrowed by banks, usually to meet reserve requirements Eurodollars Repurchase Agreements Issued Federal Funds borrowed Discount Window Borrowings
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(4) Equity (or Equity Capital) (E) E = Total Assets - Total Liabilities Increases with bank profits, decreases with bank losses Equity-Asset Ratio = (Equity/Total Assets) -- measure of bank’s health
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The Bank’s Major Assets (1) Reserves (R) -- vault cash of banks plus deposits at the Federal Reserve
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ECN 481 (6), The Banking Firm - The Banking Firm Purpose of...

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