{"id":1040,"date":"2021-12-16T07:37:40","date_gmt":"2021-12-16T07:37:40","guid":{"rendered":"https:\/\/mintea.blog\/?p=1040"},"modified":"2021-12-16T07:41:28","modified_gmt":"2021-12-16T07:41:28","slug":"1040","status":"publish","type":"post","link":"https:\/\/mintea.blog\/?p=1040","title":{"rendered":"BALANCE SHEET of COMMERCIAL BANK"},"content":{"rendered":"
\n

BALANCE SHEET of COMMERCIAL BANK<\/span><\/p>\n

-> Record all Asset & Liabilities & Capital <\/span><\/p>\n

-> MUST balance where: ASSET = LIABILITIES + CAPITAL<\/span><\/p>\n

\u00a0<\/span><\/p>\n\n\n\n\n
\n

Asset<\/span><\/p>\n<\/td>\n

\n

Liabilities<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

A1. Cash
\nA2. NOSTRO
\nA3. Money at short notice<\/span><\/p>\n

A4. Short term investment<\/span><\/p>\n

A5. Long term investment (e.g.<\/span> bonds, listed equities, derivatives)<\/span><\/p>\n

A6. LOAN<\/span><\/p>\n

A7. Fixed Assets<\/span><\/p>\n<\/td>\n

\n

L1. Deposit <\/span><\/p>\n

L2. Short Term Borrowing<\/span><\/p>\n

L3. Long Term Borrowing<\/span><\/p>\n

CAPITAL<\/span><\/b><\/span><\/p>\n

L4. Shareholders’ funds<\/span><\/p>\n

L5. Retained Profit (Reserve)<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/p>\n

L3: banks issue stock\/bond<\/span><\/p>\n

L4 & L5: the bank own<\/span> these to shareholders hence not an Asset of the bank. Share holder can withdraw at any times.<\/span><\/p>\n

A3. Interbank short term<\/span> lending. E.g. <\/span>Customers withdraw huge fund > Bank B has not enough fund to pay > Lend overnight from interbank money market to pay to Customer first then get money from NOSTRO, Cash, sell short-term investment<\/span> (bond, stock, etc.) to pay back the loan.<\/span><\/p>\n


\nCase Study: <\/span><\/b><\/span><\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
\n

Bank’s activities<\/span><\/b><\/span><\/p>\n<\/td>\n

\n

Asset & Liabilities Movement<\/span><\/b><\/span><\/p>\n<\/td>\n<\/tr>\n

\n

1, Shareholders invest 25M (bank may send a part to NOSTRO acct to ear<\/span> Interest Profit, in this example, to keep it sample<\/span>, only record to Cash)<\/span><\/p>\n<\/td>\n

\n

L4= 25 <\/span><\/p>\n

A1= 25<\/span><\/p>\n

A=L=25<\/span><\/b><\/span><\/p>\n<\/td>\n<\/tr>\n

\n

2, Lend 20M to Loan & Mortgage<\/span><\/p>\n<\/td>\n

\n

A1=5 \/ A6=20 <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

3, Invest 1M in IT system<\/span><\/p>\n<\/td>\n

\n

A1=4 \/ A7=1 <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

4, Customers<\/span> deposit 25M to their TD & DD accounts<\/span><\/p>\n<\/td>\n

\n

L1=25<\/span><\/p>\n

A1=29<\/span><\/p>\n

A=L=50<\/span><\/b><\/span><\/p>\n<\/td>\n<\/tr>\n

\n

5, Buy 10M short-term government bonds & Lend 5M to interbank money market<\/span><\/p>\n<\/td>\n

\n

A1=14 \/ A3=5 \/ <\/span>A4=10 <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

6, Earn profit 20M from interest of government bonds<\/span><\/p>\n<\/td>\n

\n

L5=20<\/span><\/p>\n

A1=34<\/span><\/p>\n

A=L=70<\/span><\/b><\/span><\/p>\n<\/td>\n<\/tr>\n

\n

7, Borrow 50M from money market to buy 5 buildings<\/span><\/p>\n<\/td>\n

\n

L2=50M<\/span><\/p>\n

A7=51M<\/span><\/p>\n

A=L=120<\/span><\/b><\/span><\/p>\n<\/td>\n<\/tr>\n

\n

8, Customers withdraw 10M from their deposit account. <\/span><\/p>\n

Any from A1-A4 can be used to pay the fund to customers (these short-term and
\nhigh liquid assets are used to pay back short-term liabilities)<\/span><\/p>\n<\/td>\n

\n

L1=15<\/span><\/p>\n

A1=24<\/span><\/p>\n

A=L=110<\/span><\/b><\/span><\/p>\n<\/td>\n<\/tr>\n

\n

9, Issue corporate bond to raise long term finance 16M<\/span><\/p>\n<\/td>\n

\n

L3=16<\/span><\/p>\n

A1=40<\/span><\/p>\n

A=L=126<\/span><\/b><\/span><\/p>\n<\/td>\n<\/tr>\n

\n

10, Buy 5M of share as a long-term invest <\/span><\/p>\n

And lend to some potential startup company 30M<\/span><\/p>\n<\/td>\n

\n

A1=5 \/ A5=5 \/ A6=50<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

11, 10M of mortgage default -> bank loss 10M<\/span><\/p>\n

If any loan goes bad, it need<\/span> to be off the balance sheet, bank loss asset and this hit to the capital of the bank, the retained profit part is hit first.<\/span><\/p>\n

Bank needs to have enough capital to absorb the loss.<\/span><\/p>\n<\/td>\n

\n

A6=40<\/span><\/p>\n

L5=10<\/span><\/p>\n

A=L=116<\/span><\/b><\/span><\/p>\n<\/td>\n<\/tr>\n

\n

12, if ALL the loan of the bank goes default -> all 40M of A6’s gone while bank’s capital is only 35 (Shareholders’ fund 25 and retained profit is 10)
\n-> Bank fail<\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

13, if ALL depositors (15M) want money back or all short-term lenders (50M) want money back too -> total 65M while high liquid assets of bank (A1-A4) only 20M -> bank doesn<\/span>‘ t have enough money to pay off the short-term liabilities -> Bank fail (liquidity crisis )<\/span><\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/p>\n

1, Not enough liquid short term<\/span> assets to meet short term liabilities -> BANK RUN<\/span><\/p>\n

2, Not enough capital to offset losses in asset values (Liabilities > Assets) -> INSOLVENCY<\/span><\/p>\n

\u00a0<\/span><\/p>\n

If bank A fail, deposit of bank B at bank A can’t be paid, loan of bank A at bank C becomes default -> Systemic Risk which impact other banks.\u00a0<\/span>Tools to prevent bank failure: Cash Ratio, Liquidity (current) Ratio, Leverage Ratio, Capital Ratio, Reserve Requirement<\/span><\/span><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

BALANCE SHEET of COMMERCIAL BANK -> Record all Asset & Liabilities & Capital -> MUST balance where: ASSET = LIABILITIES + CAPITAL \u00a0 Asset Liabilities A1. Cash A2. NOSTRO A3. Money at short notice A4. Short term investment A5. Long term investment (e.g. bonds, listed equities, derivatives) A6. LOAN A7. Fixed Assets L1. Deposit L2. … Continue reading BALANCE SHEET of COMMERCIAL BANK<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":1043,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[35],"tags":[38,37,39],"class_list":["post-1040","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-books","tag-balance-sheet","tag-banking","tag-finance"],"_links":{"self":[{"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/posts\/1040","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mintea.blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1040"}],"version-history":[{"count":5,"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/posts\/1040\/revisions"}],"predecessor-version":[{"id":1046,"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/posts\/1040\/revisions\/1046"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/media\/1043"}],"wp:attachment":[{"href":"https:\/\/mintea.blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1040"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mintea.blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1040"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mintea.blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1040"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}