Managing Banks Flashcards
What is a financial statement?
A record of a bank’s transactions including loans, investment, deposits and other assets.
What is a balance sheet?
All assets, liabilities and equity a bank has at one point in time.
What is the income statement?
Record of all revenues and costs a bank has at one point in time.
What is equity for a bank?
Assets minus liabilities
What makes up a bank’s equity?
- Paid in capital - capital owners have provided to the bank.
- Retained earnings - all earnings a bank has generated since inception minus any dividend payments to shareholders.
How does a bank raise equity?
- Sell new stock to the public or shareholders - public offering.
- Raised funds from selected investors - private offering.
- Net income - added to retained earnings.
What is leverage?
The amount of liabilities a bank has.
Why is equity important to a bank’s regulators?
More equity and lower leverage represents a bigger commitment from a bank’s owners to the longevity of the bank as more of their wealth is tied to the fortunes of the bank.
Greater cushion for the bank to absorb losses.
What would be set out in a bank’s loan loss policy?
The board approved level of acceptable losses that a bank is willing to incur on loan defaults and the cost of doing business.
How are assets on the trading book valued?
- Marked to market - value on balance sheet should reflect the fair market value.
- Fair market value - the price an asset would fetch if sold immediately to a willing buyer.
How are assets on the banking book valued?
The value of loans. This is what the bank can reasonably receive from the borrower if the loan later becomes non-performing.
What is meant when a loan is past due?
Payment of principal and interest is in doubt due to missed repayments or the borrower indicating they can’t pay. However, the loan may at some point be repaid in full.
What is meant when a loan is written down?
Loan is past due and the bank has determined it will not be able to recover the loan amount in full. Therefore, the value of the loan must be adjusted down on the financial statement to the value the bank expects to recover.
What is meant when a loan is charged off?
Loan removed from bank’s financial statements because they believe they will recover nothing from the borrower. this will reduce the bank’s equity. A bank may still try and collect the debt though.
What is a loan loss reserve?
A provision for loan loss that reduces the value of loans recorded on the balance sheet. Any provision for loan loss impacts the income statements and earnings of the bank as losses would not be recognised on the income statement if absorbed by the loan loss reserve.
