Bank's Balance Sheet
Unused commitments to lend
do not impact balance sheet
SIFI
systemically important financial institution defined as BHC with total assets > $50 Billion
liabilities
deposits, short-term funding, subordinated debt, bank/capital/equity
Net interest income
diff between interest you receive on assets (securities and loans) - interest you pay on deposits
Transaction Deposits
-Deposits that you can write a check against -Most liquid kind of deposits. -Banks hold a certain % of them on reserve at the FED
deposits
A bank's goal is to transform _________ into earning assets.
earn interest generate higher returns
Banks cannot _____ _______ on cash they have so don't want to keep a lot of it. They want to _____ _______ ______ so they use the cash they have for other investments.
Bank capital (i.e. net worth)
Difference between bank assets and liabilities
yes when a contingent event occurs
Do off-balance sheet activities ever move to the balance sheet?
through interest and fees
In general, how is revenue generated for loans?
larger
Short term debt and subordinated debt is mostly issued by _____ banks
8%
Total capital ratio must be greater than or equal to _____% at all times
True
True or False: There is a direct relationship between the income statement and the balance sheet
Fee-generating activities involve transactions that take place off the bank's balance sheet
What are off-balance sheet activites?
-Commitments to lend -guarantees like letter of credit -loan sales with recourse -derivative transactions
What are some examples of off-balance sheet activities?
1) interest expenses 2) Provisions for Loan Losses 3) Non-interest expenses: salaries, cost of physical assets (eg land), good will (?)
What are some expenses for banks?
-commercial & industrial (C&I) loans -real estate loans -consumer loans (eg credit cards) -other loans
What are some less liquid assets held by banks?
US treasuries, muni bonds, corporate bonds, fed funds sold, reverse repurchase agreements)
What are some other examples of liquid assets in banks?
-Fed Funds Purchased: buying funds in the FED system = raising rates, must be paid back with interest -Repurchased Agreements: Agreement to sell financial instruments, usually US Treasuries, with the promise to buy them back in the future (usually next day) Subordinated Debt: Longer-maturity publicly-traded bonds Subordinated (junior) to the bank's other liabilities (regulatory reasons) Issued only by large banks
What are some other liabilities other than deposits?
-Passbook Savings Account: write in an actual book and say how much you deposit into the account (now done electronically) -Money Market Deposit Accounts (MMDA): limitations on number of transactions and generally have a minimum balance requirement -Time Deposit: have a chunk of money you know will not use for specified time and put it into this account and receive higher interest for these deposits. *less liquid than first 2 -Negotiable CDs: time deposits with value >$250,000 (this is the cut-off to be fully insured by FDIC), traded in the secondary market like bonds
What are some types of Non-transaction Deposits?
1) cash - held as vault cash or on deposit 2) securities - mainly US Treasury Securities
What are the 2 main liquid assets?
1) interest income - from loans and investment securities 2) non-interest income: *fees* earned on deposits, loans, off-balance sheet activities, advisory services
What are the 2 sources of income for banks?
1) Demand Deposits - The bank must give you your funds on demand Bank can pay interest (but very little) on them insured by the regulator (FDIC) 2) NOW (Negotiable Order of Withdrawal) Accounts -Bank pays interest on funds -BUT accounts revert to the status of a demand deposit if the funds fall below a minimum balance
What are the 2 types of transaction deposits?
Income before taxes and extradordinary items
What does EBTEI stand for?
EBTEI = Net Interest Income - Provision for Loan Losses + Net Noninterest Income
What is the equation for EBTEI?
to absorb losses needed for a buffer against bankruptcy and limit risk
What is the main reason to have bank capital?
asset transformation: taking liabilities (ie deposits) and turn them into long term assets (ie loans)
What is the role of the bank?
cash and securities deposits
When you hear assets think _____ and ______ When you hear ______ think liabilities
-can be used to get around legal and capital requirements -can be used to hedge interest rate, credit and FX risks -can significantly increase the bank's risk exposures
Why are there off-balance sheet activities?
real estate
______ _____ lending = largest asset for commercial banks
Provisions for Loan Losses
an expense set aside as an allowance for uncollected loans and loan payments Funds go into the loan loss reserve, which is a contra-asset account on the balance sheet. When a bank writes off the loan, it lowers the loan loss reserve by the same amount
assets = liabilities + bank capital
bank balance sheet
assets
cash, securities, loans, other
subordinated debt
if a company goes into bankruptcy and faces liquidation there is a hierarchy among the debt owed to the company's creditors higher rank debt receive payment first, this kind receives payment after senior debt holders risky investment
deposits
largest liability for banks
Letters of credit for trade
legal document from bank that represents a promise to pay the holder if the holder fufills certain obligations used when buyers and sellers don't know each other
reverse repurchase agreement
purchase of securities with the agreement to sell them at a higher price at a specific future date
Non-transaction Deposits
used for savings & generating interest income
Derivatives
used to hedge exposures