Assets Flashcards
Cash and Due from Banks
Cash held in retail branches and ATMs; earns no interest. Tied to Deposits on the Liabilities side.
Deposits with Banks
Used for short-term borrowing and lending needs between other banks; may earn interest but rates are very low. Tied to Deposits on the Liabilities side.
Federal Funds Sold
Related to the central bank’s reserve requirements – a bank must maintain a minimum level of deposits with the country’s central bank at all times.
Securities Borrowed
Used to provide funding to bank clients by borrowing their securities in the short-term. Usually tied to Securities.
Trading Assets
Represents a bank’s long positions in debt and equity securities (e.g. how much they have invested with the expectation that their investment will rise in value). Also includes certain derivative instruments. Only the debt portion earns interest.
These assets are marked-to-market and any gains or losses over the historical cost are reported on the income statement. Most trading assets are used for market-making activities but some may be used for proprietary trading as well.
May move independently of loans and deposits.
Securities
Primarily available-for-sale (AFS) securities; used to invest cash from excess deposits / funding and to manage exposure to interest rate risk.
May move independently of loans/deposits, but often tied to deposits.
Gross Loans
The most important line item on a bank’s balance sheet. Consists of loans issued to consumers, corporations, and institutions; the key driver of a bank’s business and where most of their interest income comes from. Reported net of charge-offs on the balance sheet.
Projected via a bottoms-up loan portfolio build, or a simple growth %.
Allowance for Loan Losses
How much the bank expects to lose on its total gross loans. Listed as a contra-asset in most countries; equivalent to a liability.
Add new provisions for credit losses and subtract net charge-offs.
Net Loans
The actual loan asset that factors into the Total Assets calculation; Gross Loans minus Allowance for Loan Losses.
Despite this, note that any balance sheet items linked to loans are projected as a percent of Gross Loans rather than Net Loans.
Accrued Interest
Interest owed to the bank on interest-earning assets. Usually a % of Gross Loans.
Accounts Receivable
Same as AR for a normal company; represents receivables from brokers, dealers, clearing organizations, and so on. % of Gross Loans.
Premises and Equipment
Same as PP&E for a normal company, but it is much smaller (relatively) and less important for a commercial bank.
Goodwill
Same as Goodwill for a normal company: the premium paid for acquisitions over the fair market value of assets. Usually held constant.
Mortgage Servicing Rights (MSR)
A type of intangible asset specific to banks; MSRs represent the right to future cash flows for servicing mortgages.
For example, a 3rd party lender might issue a new mortgage and then say, “Hey, can you collect principal, tax, insurance, and so on for us? We’ll pay you to help out with that.”
Then when you purchase these rights, they show up on your balance sheet and you get to earn revenue from them in the future.
Despite being intangible assets, these are counted as tangible assets and included in Tier 1 Capital and tangible book value – because unlike Goodwill or Other Intangibles, they represent real cash flow in the future.
Add the MSR origination each year and subtract Mortgage Fees & Income on the Income Statement to get this number.
Other Intangible Assets
Just like intangible assets for a normal company; for a bank they consist of items like credit card relationships and core deposit intangibles (premium paid in excess of another bank’s deposits in an acquisition).
Follow the amortization schedule in the filings to get these; sometimes a portion of intangibles is allowed to count toward Tier 1 Capital.
