1. A bank balance sheet is different from that of a typical company. Explain the differences.
It is clear that there are some differences between a bank balance sheet and a company balance sheet, after all, they are different types of business, and although they share some similarities, they do differ in some aspects, let’s take a closer look. A company balance sheet summarizes, “the net assets of a company by subtracting total liabilities from total assets to arrive at total equity.” (Shaftoe, R.) In other words, the main object is to present in a clear manner the company’s financial information. In the other hand, a bank balance sheet, “values more generally approximate fair values and are used by bank management largely to manage interest …show more content…
Instead, under assets, “you 'll see mostly loans and investments, and on the liabilities side, you 'll see deposits and borrowings.” (Lee, E.)
One of the aspects playing a role on a bank balance sheet is “Cash”. This one in particular, does not seem to be crucial, nonetheless, it is important and fundamental, although its percentage seems to be little significant, this is because, “the bank wants to put its money to work earning interest. If the bank simply sticks its cash in a vault and forgets about it, it will have a hard time making a profit. Thus, a bank keeps most of its money tied up in loans and investments, which are called "earning assets" in bank-speak because they earn interest.” (Lee, E.)
Another feature in a bank balance sheet is the “Securities”. “Banks don 't like putting their assets into fixed-income securities, because the yield isn 't that great. However, investment-grade securities are liquid, and they have higher yields than cash, so it 's always prudent for a bank to keep securities on hand in case they need to free up some liquidity.” (Lee, E.) It looks like they are truly important after all, Aren’t they? They might seem a little boring, but they certainly are notable, and will always provide some sense of security, making a good reference to its …show more content…
“A bank can typically earn a higher interest rate on loans than on securities, roughly 6%-8%.” (Lee, E.) Illustrating that loans are a vital part of a bank balance, and that they play a major role on it. Nonetheless, a bigger importance comes along with a bigger responsibility, “Loans, however, come with risk. If the bank makes bad loans to consumers or businesses, the bank will take a hit when those loans aren 't repaid.” (Lee, E.) This is natural in the business field, just like in shares of stock, a higher risk level always represents bigger losses or gains, that is why it is critical to fathom this specific aspect of a bank balance
It is clear that there are some differences between a bank balance sheet and a company balance sheet, after all, they are different types of business, and although they share some similarities, they do differ in some aspects, let’s take a closer look. A company balance sheet summarizes, “the net assets of a company by subtracting total liabilities from total assets to arrive at total equity.” (Shaftoe, R.) In other words, the main object is to present in a clear manner the company’s financial information. In the other hand, a bank balance sheet, “values more generally approximate fair values and are used by bank management largely to manage interest …show more content…
Instead, under assets, “you 'll see mostly loans and investments, and on the liabilities side, you 'll see deposits and borrowings.” (Lee, E.)
One of the aspects playing a role on a bank balance sheet is “Cash”. This one in particular, does not seem to be crucial, nonetheless, it is important and fundamental, although its percentage seems to be little significant, this is because, “the bank wants to put its money to work earning interest. If the bank simply sticks its cash in a vault and forgets about it, it will have a hard time making a profit. Thus, a bank keeps most of its money tied up in loans and investments, which are called "earning assets" in bank-speak because they earn interest.” (Lee, E.)
Another feature in a bank balance sheet is the “Securities”. “Banks don 't like putting their assets into fixed-income securities, because the yield isn 't that great. However, investment-grade securities are liquid, and they have higher yields than cash, so it 's always prudent for a bank to keep securities on hand in case they need to free up some liquidity.” (Lee, E.) It looks like they are truly important after all, Aren’t they? They might seem a little boring, but they certainly are notable, and will always provide some sense of security, making a good reference to its …show more content…
“A bank can typically earn a higher interest rate on loans than on securities, roughly 6%-8%.” (Lee, E.) Illustrating that loans are a vital part of a bank balance, and that they play a major role on it. Nonetheless, a bigger importance comes along with a bigger responsibility, “Loans, however, come with risk. If the bank makes bad loans to consumers or businesses, the bank will take a hit when those loans aren 't repaid.” (Lee, E.) This is natural in the business field, just like in shares of stock, a higher risk level always represents bigger losses or gains, that is why it is critical to fathom this specific aspect of a bank balance