How a bank operates as a business Flashcards
Commercial banks make money by dealing in money. What are the major functions of a commercial bank?
- Accept Deposits
- Grant loans
- Act as an agent for payments
- Provide a range of other services
What are the 3 main ways bank make money?
1) Lending some of the money deposited by savers to borrowers and charging these borrowers interest on the sums loaned
2) Charging fees for products and services
3) Investing the money deposited by savers
What appears on a banks balance sheet as assets?
The money a lank lends to customers and other banks appear as assets
What are the main type of assets we would expect to see on a banks balance sheet?
Notes and coin Balances with the Bank of England Loaned and advances to banks Bills Investments Advances Premises and equipment
Assets held by banks-
Notes and coin- description
This is the physical cash that is held in tolls, branch safes, cash machines and in centralised cash-handling areas of the bank. It is up to each bank to decide how much cash to keep to meet customers’ withdrawal demands
What appears on a banks balance sheet as a liability?
Money deposited as customer appears as liabilities because this money is repayable to customers.
Either on demand or on expiry of a notice period
What is liquidity in accounting terms?
Liquidity is the measure of the ability of a debtor to pay their debts as they fall due.
The bank, which has effectively “__________” the money its customers have _________, must keep enough cash ___________ to repay this ______ to ___________ who want to ________ it.
The bank, which has effectively “borrowed” the money its customers have deposited, must keep enough cash available to repay this money to customers who want to withdraw it.
How does have enough liquidity effect a bank when trying to make a profit?
If a bank was to keep enough cash available to meet all likely withdrawals, it would not be able to invests it to make a profit
Assets held by banks-
Balances with the Bank of England- Description
There is a statutory requirement for banks to hold non-operational, non-interest bearing deposits with the Bank of England. The amount of these deposits is a percentage of “eligible liabilities” these are sterling deposit liabilities of less than two years until maturity, net foreign currency liabilities and some inter-bank liabilities. Banks also hold non-interest bearing operational with the Bank of England to meet both cash needs and make inter-bank settlements
Assets held by banks-
Loans and advances to banks- description
These are short term loans made by one bank to another
Assets held by banks-
Bills- description
These are promises to pay money on a stated date. Once one of these bills is purchased by a bank, it becomes a short-term loan from the purchasing bank to its customer. These bills are negotiable, which means that they can be bought and sold in the market. The bills may be treasury bills, or other bills. Treasury bills, as the name implies, are issued by the UK treasury as short-term loans to the government. Banks will often buy these bills on the secondary market when they are near to their maturity date.
Assets held by banks-
Investments- description
These can consist of government stocks and shares in other companies, as well as shareholding in subsidiary companies of the bank, such as a finance house.
Assets held by banks-
Advances- Description
It would be expected that this would be the biggest assess of a bank- it represents the loans made by the bank to its customers
Assets held by banks-
Premises and equipment- description
These are the properties owned by the bank to conduct its operations, branches, processing centres, contact centres and regional/head offices. Equipment would include, for example, computers and vehicles
