LECTURE 5 NOTES - LECTURE 5 NOTES-Commercial bank...

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LECTURE 5 NOTES --Commercial bank activities and balance sheet --Off-balance sheet activities of commercial banks --Risks associated with commercial banks --Trends in the commercial bank sector --International expansion --Regulation of commercial banks --Basel I and II Accords, Basel III Proposal COMMERCIAL BANK ACTIVITIES --Commercial banks are depository institutions, e.g. significant proportion of their funds come from customer deposits. Definition: They accept deposits and make loans. --Other depository institutions include savings institutions, credit unions. --Commercial banks differ from other depository institutions in the SIZE and COMPOSITION of their loans and deposits. Their loans include consumer, commercial, international, real estate loans, etc. --Commercial banks play a key role in the transmission of monetary policy for the CB to the rest of the economy. Types of Commercial Banks: --Community Bank: A bank that specializes in retail or consumer banking. --Retail Banking: Consumer-oriented banking, such as providing residential and consumer loans and accepting smaller deposits. These are decreasing in number. --Wholesale Banking: Commercial-oriented banking, such as providing commercial and industrial loans. --Money Center Banks: A bank that relies heavily on nondeposit or borrowed sources of funds. Exmp: Deutsche Bank, Citigroup, HSBC. 1
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--Small banks usually focus on the retail side of business and they have fewer off- balance-sheet assets. --Large banks focus on both retail and wholesale side of business. They have easier access to capital markets. They have more non-interest income. They pay higher salaries. COMMERCIAL BANK BALANCE SHEET --Commercial banks’ major assets are loans and their major liabilities are deposits. The opposite is true for nonfinancial firms, e.g. nonfinancial firms’ major assets are deposits and major liabilities are loans. Assets: --Commercial bank assets include industrial loans, interbank loans, cash assets, gov’t securities, investment securities, etc. --Loans are the main revenue-generating assets for banks. Investment securities include mortgage-backed and municipal securities. Liabilities: --Liabilities of commercial banks include deposits, transaction accounts: checkable deposits that either bear no interest (demand deposits) or are interest bearing (NOW accounts=negotiable order of withdrawal/min balance requirements). --Small deposits include household savings and time deposits (individual account holdings). Large time deposits include CDs which have fixed maturities and are interest- bearing. Equity: --Common, preferred stock, retained earnings. OFF-BALANCE SHEET ACTIVITIES OF COMMERCIAL BANKS --Off-balance sheet activities of commercial banks include engaging in derivative transactions, making future commitments to lend, letters of credit, trust services, and correspondent banking. --Banks get fees in return. Avoid costs or taxes. Can involve or help avoid risks.
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This note was uploaded on 11/18/2011 for the course FIN 353 taught by Professor Cobus during the Fall '08 term at S.F. State.

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LECTURE 5 NOTES - LECTURE 5 NOTES-Commercial bank...

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