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slides13 - Mishkin ch.10 Banking 1 Bank balance sheets 2...

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[Notes on Mishkin Ch.10 - P.1] Mishkin ch.10: Banking 1. Bank balance sheets 2. Reserve Management - Holding reserves - Borrowing from other banks => Fed-funds market - Borrowing from the Fed => Discount loans (regular and term auction) 3. Asset & Liability Management Issues: Risk, Return & Liquidity (Like Mishkin ch.5) - Credit risk : The economic role of banks is to evaluate borrowers - Interest Rate Risk : Short-term deposits and longer-term loans - Liquidity Risk => Reserve management Digression: What is a bank run ?
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[Notes on Mishkin Ch.10 - P.2] The Essence of Banking: Deposits & Loans Assets Liabilities Loans L Deposits D Reserves R Bank Capital Deposits D . Pay interest rate i D => Cost of deposit-taking: [i D + (expenses) ]·D Loans L . Pay interest rate i L => Earnings: [i L - (monitoring cost) - (default rate) ]·L - After adjusting for: Credit risk => Monitoring cost - Deposit taking & lending is profitable if (i L - i D ) exceeds the cost Reserves R = Vault cash or balance in a Federal Reserve account - Reserves do not pay interest. They reduce deposits that can be loaned out => Task of reserve management: Keep R low.
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