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Lecture08 - Topic 8 page 1 Topic 8 Bank Management...

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Topic 8, page 1 Topic 8 Bank Management Eco 350 • Money and Banking Department of Economics, SUNY
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1. The Bank’s Balance Sheet Topic 8, page 2 Assets: Uses of Funds Liabilities and Net Worth: Sources of Funds i. Reserves: Vault cash and deposits at the Fed ii. Other cash items i. Checkable deposits ii. Other deposits: Savings accounts, time deposits Eco 350 • Money and Banking Department of Economics, SUNY iii. Securities: Government bonds iv. Loans (2/3 of assets) v. Other assets (CDs) (1/2of funds) iii. Borrowings: Loans owed by the bank iv. Bank capital: Net worth
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Topic 8, page 3 T ABLE 1 Balance Sheet of All Commercial Banks (items as a percentage of the total, December 2008) Eco 350 • Money and Banking Department of Economics, SUNY
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2. How Banks Make Profits A. Asset Transformation i. Sell high liquidity, low risk, low return liabilities ii. Buy lower liquidity, higher risk, higher return assets Topic 8, page 4 Eco 350 • Money and Banking Department of Economics, SUNY
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2. How Banks Make Profits A. Asset Transformation i. Sell high liquidity, low risk, low return liabilities ii. Buy lower liquidity, higher risk, higher return assets B. Utilize economies of scale in diversification, liquidity, etc. Topic 8, page 5 Eco 350 • Money and Banking Department of Economics, SUNY Risk Expected Return (%) Individual’s Portfolio Bank’s Portfolio
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2. How Banks Make Profits (continued) C. Basic operation of a bank i. You deposit a $100 bill in your checking account with HSBC. Topic 8, page 6 HSBC Assets Liabilities Vault cash $100 Checkable $100 Eco 350 • Money and Banking Department of Economics, SUNY Deposits
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2. How Banks Make Profits (continued) C. Basic operation of a bank i. You deposit a $100 bill in your checking account with HSBC. Topic 8, page 7 HSBC Assets Liabilities Reserves $100 Checkable $100 Eco 350 • Money and Banking Department of Economics, SUNY Deposits
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2. How Banks Make Profits (continued) C. Basic operation of a bank ii. You deposit a $100 check written on an account at BofA in your checking account with HSBC. Topic 8, page 8 HSBC Assets Liabilities Cash items $100 Checkable $100 Eco 350 • Money and Banking Department of Economics, SUNY in process of collection Deposits
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2. How Banks Make Profits (continued) C. Basic operation of a bank ii. You deposit a $100 check written on an account at BofA in your checking account with HSBC. Topic 8, page 9 HSBC Assets Liabilities Reserves $100 Checkable $100 Eco 350 • Money and Banking Department of Economics, SUNY Deposits BofA Assets Liabilities Reserves -$100 Checkable Deposits -$100
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2. How Banks Make Profits (continued) C. Basic operation of a bank ii. You deposit a $100 check written on an account at BofA in your checking account with HSBC. HSBC Assets Liabilities Reserves $100 Checkable $100 Topic 8, page 10 Eco 350 • Money and Banking iii.When a bank receives (loses) additional deposits, it gains (loses) an equal amount of reserves.
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