The Balance Sheet Concepts Of A Bank

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A balance sheet is a financial statement that shows the assets (what the company owns), liabilities (what the company owes) and equity (stockholders contributions plus retained earnings or losses) of an institution at a given point in time.

The balance sheet formula is: Assets = liabilities + shareholder’s equity. The balance sheet formula of a bank is: Bank Assets = Bank liabilities + Bank’s capital

The difference between the two is the way assets and liabilities are recorded and on the different accounts used. When a corporation has money deposited in a bank, it is considered an asset in the balance sheet. In the balance sheet of the bank, a customer’s deposit shows as a liability. (Wrigth, R.E., & Quadrini, V. 2009)

Banks’ assets include: reserves (cash and deposits with the
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The liabilities in the balance sheet of a corporation include: accounts payable, short term debt, medium and long term debt and shareholders’ equity. (Understanding Balance Sheets fool.com)

Managers prefer loans over securities because securities yield lower interest rates than loans. Loans are the ASSETS of the bank, without which the bank would not be able to operate; it is the equivalent of the raw material for a manufacturing industry. Loans are the main business of banks and generate the largest revenue. Banks invest in securities for liquidity risk management, since they are liquid, have low default risk, yield more than cash in the vault and are tradable in secondary markets. Banks try to minimize the amount of securities they hold. (Wrigth, R.E., & Quadrini, V. 2009)

Example: mortgage loan of $100,000 at 3.5% interest for a term of 15 years, will bring the bank $3,417 in the first year, whereas $100,000 deposit in securities, paying .50%, will result in $501 in 1 year. (Mortgage

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