unit 9 and 10 content Flashcards
what are considered liabilities
liabilities are what banks owe to others, it represents the banks debts or obligations checkable deposits (checking accounts), nontransaction deposits (savings accounts), borrowing (banks borrowing from other institutions or the central bank), bank capital (difference between its assets and libabilities)
what do liabilities have
maturity
what do assets have
rights but no maturity
what are assets
Assets are things that the bank owns or is owed, they are resources that provide value to the bank such as reserves (funds kept on hand in the bank to meet daily transaction needs) you have required reserves and excess reserves, cash items in process of collection (checks or other payments that have been deposited but not fully processed or cleared, deposits at other banks, securities (securities are investments the bank holds such as stocks or bonds) , loans
what does the opening of a checking account lead to?
an increase in the banks reserves equal to the increase in the checkable deposit
what happens when banks gain and lose deposits
when a bank receives additional deposits it gains an equal amount of reserves when it loses deposits it loses an equal amount of reserves
what is asset transformation
selling liabilities with on set of characteristics using the proceeds to buy assets with a different set of characteristics
how do banks lend and borrow
banks borrow short and lend long
what are the general principles of bank management
liquidity management, asset management, liability management, capital adequacy management, credit risk, interest rate risk
excess reserves
excess reserves are insurance against the cost associated with deposit outflows
what does selling securities do
its a way to increase liquidity
what is the cost of selling securities
brokerage and other transaction costs
what is last resort borrowing for banks
borrowing from the federal reserve
what is the most costly way of aquiring reserves
reduction in loans
what are the three goals of asset management
seek highest possible returns on loans and securities, reduce risk, have adequate liquidity
what are the 4 tools for asset management
find borrowers who will pay high interest rates and have low possibility of defaulting, purchase securities with high returns and low risk, lower risk by diversifying, balance need for liquidity against increased returns from less liquid assets
checkable deposits and liability management
checkable deposits have decreased in importance as source of bank funds
return on assets
net profits after taxes/ assets
net profit after taxes per dollar of assets
return on equity
net profit after taxes/ equity capital
net profit after taxes per dollar of equity capital
what is the relationship between ROA and ROE and how is it expressed
expressed by the equity multiplier which is the amount of assets per dollar of equity capital
EM= Assets/ Equity Capital
net profits after taxes/equity capital= net profits after taxes/assets (assets/equity capital)
ROE=ROA/EM
trade off between safety and returns to equity holders
benefits owners of bank by making investment safe, costly to owners of the bank because higher the bank capital lower the return on equity
how do you manage credit risk
screening, specialization in lending, monitoring and enforcement of restrictive covenants, longer term customer relations, credit rationing, collateral and compensating balances
bank capital and liability
bank capital is not a liability in the traditional sense but is included in discussion of liabilities because it represents the financial cushion that absorbs risks, its the net worth of the bank
what is equity capital
the ownership stake in the bank and it is the difference between the banks assets and liabilities
