Lec4303_CH17-21 - Financial Markets and Institutions...

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Financial Markets and Institutions Chapter 17 Banking and the Management of Financial Institutions
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Lecture Objectives The Bank Balance Sheet Basics of Banking General Principles of Bank Management Off-Balance Sheet Activities Measuring Bank Performance
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The Bank Balance Sheet The Balance Sheet is a list of a bank’s assets and liabilities Total assets = total liabilities + capital
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The Bank Balance Sheet A bank’s balance sheet lists sources of bank funds (liabilities) and uses to which they are put (assets) Banks invest these liabilities (sources) into assets (uses) in order to create value for their capital providers
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Flow of funds (tab down to commercial banks) http://www.federalreserve.gov/releases/z1/current The Bank Balance Sheet
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The Bank Balance Sheet: Liabilities Checkable Deposits : includes all accounts that allow the owner (depositor) to write checks to third parties. Nontransaction Deposits : are accounts from which the depositor cannot write checks. Borrowings : banks obtain funds by borrowing from the Federal Reserve System, other banks, and corporations.
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The Bank Balance Sheet: Bank Capital Bank Capital : is the source of funds supplied by the bank owners, either directly through purchase of ownership shares or indirectly through retention of earnings (retained earnings being the portion of funds which are earned as profits but not paid out as ownership dividends). This is about 8% of assets.
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The Bank Balance Sheet: Assets Reserves : funds held in account with the Fed. Required reserves represent what is required by law under current required reserve ratios . Any reserves beyond this area called excess reserves . Securities : these are either U.S. government/agency debt, municipal debt, and other (non-equity) securities.
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The Bank Balance Sheet: Assets Loans : representing 74% of assets, these are a bank’s income-earning assets, such as business loans, auto loans, and mortgages. Other Assets : bank buildings, computer systems, and other equipment.
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Basics of Banking - without bank regulation Conclusion: When bank receives deposits, reserves by equal amount; when bank loses deposits, reserves by equal amount First National Bank Assets Liabilities Reserves and cash items +$100 Deposits +$100 $100 deposit into First National Bank from Second National Bank
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Basics of Banking – with bank regulation T-account Analysis: Deposit of $100 cash into First National Bank Assume that reserve ratio = 10% First National Bank Assets Liabilities Required reserves Excess reserves +$10 +$90 Checkable deposits +$100
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Basics of Banking – with bank regulation T-account Analysis: Deposit of $100 cash into First National Bank $10 of the deposit must remain with the bank to meet federal regulations The bank loans the $90 to its customers First National Bank Assets Liabilities Required reserves Loans +$10 +$90 Checkable deposits +$100
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Lec4303_CH17-21 - Financial Markets and Institutions...

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