Banks management of the amount of the gross loans and

This preview shows page 8 - 9 out of 33 pages.

bank’s management of the amount of the gross loans (and leases) that will not be repaid to the bank. Although the maximum amount of the reserve is influenced by tax laws, the bank’s management actually sets the level based on loan growth and recent loan loss experience. The allowance for loan losses is an accumulated reserve that is adjusted each period as management recognizes the possibility of additional bad loans and makes appropriate provisions for such losses. Actual losses are then deducted from, and recoveries are added to (referred to as net write-offs ), their accumulated loan and lease loss reserve balance. Investment securities plus net loans and leases are the earning assets of a depository institution. It is these items on the balance sheet that generate interest income and some of the noninterest income described below. Other Assets. Other assets on the bank’s balance sheet (item 26) consist of items such as premises and fixed assets (item 22), other real estate owned (collateral seized on defaulted loans—item 23), intangible assets (i.e., goodwill and mortgage servicing rights—item 24), and other (i.e., deferred taxes, prepaid expenses, and mortgage servicing fees receivable—item 25). These accounts are generally a small part of the bank’s overall assets. Liabilities A bank’s liabilities consist of various types of deposit accounts and other borrow- ings used to fund the investments and loans on the asset side of the balance sheet. Liabilities vary in terms of their maturity, interest payments, check-writing privi- leges, and deposit insurance coverage. Deposits. Demand deposits (item 28) are transaction accounts held by indi- viduals, corporations, partnerships, and governments that pay no explicit inter- est. Corporations are prohibited from using deposits other than demand deposits (e.g., NOW accounts) for transaction account purposes. This group therefore consti- tutes the major holders of demand deposits. Since 1980, all banks in the United States have been able to offer checkable deposits that pay interest and are withdrawable on demand; they are called negotiable order of withdrawal accounts, or NOW accounts 7 (item 29). The major distinction between these instruments and traditional demand deposits is that these instruments require the depositor to maintain a minimum ac- count balance to earn interest. If the minimum balance falls below some level, such as $500, the account formally converts to a status equivalent to a demand deposit and earns no interest. Also, there are restrictions on corporations holding NOW accounts. Money market deposit accounts or MMDAs (item 30) are an additional liability instrument that banks can use. To make banks competitive with the money mar- ket mutual funds offered by groups such as Vanguard and Fidelity, the MMDAs they offer must be liquid. In the United States, MMDAs are checkable but sub- ject to restrictions on the number of checks written on each account per month, the number of preauthorized automatic transfers per month, and the minimum denomination of the amount of each check. In addition, MMDAs impose mini-
Image of page 8

Subscribe to view the full document.

Image of page 9
You've reached the end of this preview.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern