1. ALOMAR_212_51 Chapter 9 A Banking and the Management of Financial Institutions

2. ALOMAR_212_52  Commercial Banks play an important role in channeling funds from those with excess of funds to those with shortage of funds (productive investment opportunities).

3. ALOMAR_212_53  Commercial banks are financial intermediaries. - Why banks are important? - How banking is conducted to earn the highest profits? - How and why banks make loans? - How banks acquire and manage funds (assets\liabilities)?

4. ALOMAR_212_54 1- The Bank Balance Sheet - Total Assets = Total Liabilities + Capital - The bank’s balance sheet lists: Liabilities: sources of bank funds, and Assets: uses with which funds are put.

5. ALOMAR_212_55 - Banks obtain funds by borrowing and by issuing other liabilities (deposits). - Banks use funds to acquire assets: (securities, loans,...) - Banks make profits by: charging an interest rate on their holdings (securities, loans, …) that is higher than the costs of their liabilities (deposits,…).

6. ALOMAR_212_56 Balance Sheet of a Commercial Bank Assets (A) Liabilities (L) (Uses of Funds) (Sources of Funds) - Reserves (including cash items) - Deposits (D): RR + ER Checkable Deposits - Securities Non-transaction D - Loans Saving D - Other Assets (physical assets) Small denomination time D Large denomination time D - Borrowings - Bank Capital Total = X Total = X

7. ALOMAR_212_57  - Liabilities: Sources of funds. These funds are obtained by issuing (selling) liabilities:  A. Checkable deposits:  all bank accounts that allow the owner of the account to write checks to third party.  Checkable deposits are bank liabilities because the owner of the deposit can withdraw from the account funds that the bank is obligated to pay.

8. ALOMAR_212_58  The primary source of bank funds, Owner cannot write checks, but earn higher interest than those on checkable deposits. This includes: savings accounts and times deposits (small and large (CDs)).

9. ALOMAR_212_59 B. Nontransaction deposits: C. Borrowings: from the central bank (discount loans) and other commercial banks (overnight). D. Bank Capital: the bank’s net worth: the difference between total assets and liabilities.  Funds are raised by: selling new equity (stock) or retained earnings.  Used against a drop in banks assets.

10. ALOMAR_212_510  Assets: uses of funds, the bank acquired these funds by issuing liabilities in order to purchase income earning assets.  A. Reserves:  Some of the funds that the bank acquire that are deposited at the central bank + Currency held by the bank (vault cash).

11. ALOMAR_212_511  Reserves do not pay interest but the bank do hold them because: 1- Reserve Requirements (required reserve ratio) 2- Excess Reserve  Both can be used to meet obligations when funds are withdrawn.

12. ALOMAR_212_512  B. Cash items in process of collection  C. Deposits at other banks  D. Securities: an important income-earning asset: (securities: debt instruments for commercial banks.  E. Loans: a liability for second party (individual or firm) receiving it but considered a bank’s asset.  F. Other assets: Physical capital.