Chapter 12

1. Chapter 12 Depository Institutions: Banks and Bank Management

2. The Balance Sheet of Commercial Banks • Balance Sheet Identity • Total Bank Assets = Total Bank Liabilities + Bank Capital

3. Web Page – Board of Governors

4. The Balance Sheet of Commercial Banks • Assets: Uses of Funds • Cash Items • reserves • cash items in process of collection • vault cash • Securities • secondary reserves • Loans

5. The Balance Sheet of Commercial Banks

6. The Balance Sheet of Commercial Banks • Liabilities: Sources of Funds • Checkable Deposits • Non-transactions Deposits • Borrowings • discount loans • federal funds market.

7. The Balance Sheet of Commercial Banks

9. The Balance Sheet of Commercial Banks • Bank Capital and Profitability • bank capital • ROA = Net profit after taxes Total bank assets • ROE= Net profit after taxes Bank capital

11. Bank Risk • Liquidity Risk • the risk of a sudden demand for liquid funds

12. Bank Risk

13. Bank Risk

14. Bank Risk

15. Bank Risk

16. Bank Risk • Credit Risk • a bank’s loans will not be repaid

17. Bank Risk • Interest-Rate Risk • bank's liabilities tend to be short-term, while its assets tend to be long-term. This mismatch between the maturities of the two sides of the balance sheet creates interest-rate risk.

19. Bank Risk • Trading Risk • If the price at which an instrument is purchased differs from the price at which it is sold, the risk is that the instrument may go down in value rather than up. This type of risk is called trading risk

20. Bank Risk • Other Risks • Foreign exchange risk comes from holding assets denominated in one currency and liabilities denominated in another • Sovereign risk arises from the fact that some foreign borrowers may not repay their loans, not because they are unwilling to, but because their government prohibits them from doing so. • operational risk

22. Chapter 12 Depository Institutions: Banks and Bank Management