Chapter 9,Banking and the Management of Financial Institutions,9.1 The Bank Balance Sheet,9.1.1 Liabilities,1. Checkable deposit Bank accounts that allow the owner to write checks to third parties. Includes : -Demand deposit -NOW accounts: -MMDAs: similar to money market mutual funds and not subject to reserve requirements Once are the most important source of bank funds, but the share has shrunk over time. Usually the lowest-cost source of bank fund.,2. Nontransaction Deposit Primary source of bank funds. Owners cannot write checks, but the interest rates are usually higher. Two types: -Savings accounts -Time deposit: have a fixed maturity length. 3. Borrowings More and more important.,4. Bank Capital The difference between total assets and liabilities.(8%) Raised by selling new stock or from retained earnings. Is a cushion against a drop in the value of its assets.,9.1.2 Assets,1. Reserves Reserves = Vault cash + Deposits in an account at the central bank ( required reserves + excess reserves) No interest payment. Banks hold reserves for two reasons: 1) Reserve requirement 2) Reserves are the most liquid and can be used to meet its obligations when funds are withdrawn. 中国的历次调整http:/finance.sina.com.cn/focus/zhbj2_2012/,2. Cash items in process of collection Suppose a check written on an account at another bank is deposited in your bank and the funds for this check have not yet been received from the other bank. 3. Deposits at other banks Many small banks hold deposits in larger banks in exchange for a variety of services. All of the above three are referred to as cash items. Importance shrinking over time.,4.Securities An important income-earning asset.(23%) Made up entirely of debt instruments. 5. Loan Banks make their profits primarily by issuing loans. (66%) Typically less liquid and have a higher probability of default than other assets. 5. Other assets The physical capital owned by the banks.,浦发银行2011年资产负债表,9.2 Basic Banking,Asset transformation Selling liabilities with one set of characteristics and using the proceeds to buy assets with a different set of characteristics. “Borrows short and lends long.”,T-account Analysis: Deposit of $100 cash into First National Bank Assets Liabilities Vault Cash + $100 Checkable Deposits + $100 (=Reserves) Deposit of $100 check into First National Bank Assets Liabilities Cash items in process Checkable Deposits + $100 of collection + $100 First National Bank Second National Bank Assets Liabilities Assets Liabilities Checkable Checkable Reserves Deposits Reserves Deposits + $100 + $100 $100 $100 Conclusion: When bank receives deposits, reserves by equal amount; when bank loses deposits, reserves by equal amount,Basic Banking: Making a Profit,9.3 General Principles of Bank Management,1. Liquidity Management 2. Asset Management Managing Credit Risk Managing Interest-rate Risk 3. Liability Management 4. Capital Adequacy Management,9.3.1 Liquidity Management,Reserve requirement = 10%, Excess reserves = $10 million Assets Liabilities Reserves $20 million Deposits $100 million Loans $80 million Bank Capital $ 10 million Securities $10 million Deposit outflow of $10 million Assets Liabilities Reserves $10 million Deposits $ 90 million Loans $80 million Bank Capital $ 10 million Securities $10 million With 10% reserve requirement, bank still has excess reserves of $1 million: no changes needed in balance sheet,Liquidity Management,No excess reserves Assets Liabilities Reserves $10 million Deposits $100 million Loans $90 million Bank Capital $ 10 million Securities $10 million Deposit outflow of $ 10 million Assets Liabilities Reserves $ 0 million Deposits $ 90 million Loans $90 million Bank Capital $ 10 million Securities $10 million,Liquidity Management,1. Borrow from other banks or corporations Assets Liabilities Reserves $ 9 million Deposits $ 90 million Loans $90 million Borrowings $ 9 million Securities $10 million Bank Capital $ 10 million 2. Sell Securities Assets Liabilities Reserves $ 9 million Deposits $ 90 million Loans $90 million Bank Capital $ 10 million Securities $ 1 million,Liquidity Management,3. Borrow from Fed Assets Liabilities Securities $10 million Bank Capital $ 10 million Reserves $ 9 million Deposits $ 90 million Loans $90 million Discount Loans $ 9 million 4. Call in or sell off loans Assets Liabilities Reserves $ 9 million Deposits $ 90 million Loans $81 million Bank Capital $ 10 million Securities $10 million Conclusion: excess reserves are insurance against above 4 costs from deposit outflows,Bank Run of Northern Rock,Northern Rock was best known for becoming the first bank in 150 years to suffer a bank run after having had to approach the Bank of England for a loan facility, to replace money market funding, during the credit crisis in 2007. Having failed to find a commercial buyer for the business, it was taken into public ownership in 2008, and was then bought by Virgin Money in 2012.,9.3.2 Asset Managem