What are bank liabilities?
Sources of funds that banks use to purchase income-earning assets.
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| Term | Definition |
|---|---|
| What are bank liabilities? | Sources of funds that banks use to purchase income-earning assets. |
| What are checkable deposits? | Bank accounts allowing owners to write checks; payable on demand; lowest-cost source of bank funds. |
| What are nontransaction deposits? | Primary source of bank funds; cannot write checks but pay higher interest. |
| Types of nontransaction deposits? | Savings accounts and time deposits (small- and large-denomination CDs). |
| What are large-denomination time deposits (CDs)? | Negotiable deposits ≥ $100 |
| What are borrowings for banks? | Funds from the Fed |
| What is bank capital? | Bank’s net worth (assets – liabilities); cushion against asset losses. |
| What are reserves? | Deposits at the Fed + vault cash; include required and excess reserves. |
| What are required reserves? | Portion of checkable deposits banks must hold by regulation. |
| What are excess reserves? | Additional reserves held for liquidity protection. |
| What are cash items in process of collection? | Claims on other banks for checks deposited but not yet cleared. |
| What are deposits at other banks? | Deposits small banks hold at large banks for services (correspondent banking). |
| What are securities for banks? | Debt instruments held by banks; provide ~10% of revenue; include U.S. government |
| What are secondary reserves? | Short-term U.S. government securities with high liquidity. |
| What are loans? | Primary income source; less liquid |
| What are other assets? | Physical capital like buildings and equipment. |
| What is asset transformation? | Process of selling liabilities with certain characteristics to buy assets with different ones. |
| What is a T-account? | Simplified balance sheet showing changes in assets and liabilities. |
| What happens when a bank receives deposits? | Reserves increase by the same amount; when deposits fall |
| What are deposit outflows? | Withdrawals causing loss of deposits. |
| What are the four key management areas? | Liquidity, asset, liability, and capital adequacy management |
| What are the main bank risks? | Credit risk and interest-rate risk. |
| If reserves are insufficient what four actions can banks take? | 1. Borrow from other banks; 2. Sell securities; 3. Borrow from the Fed; 4. Reduce loans. |
| Why hold excess reserves? | Insurance against costs of deposit outflows. |
| What are the 4 strategies for asset management? | 1. Lend to good borrowers; 2. Buy high-return |
| What is liability management? | Acquiring funds at low cost and managing both sides of balance sheet (via ALM committee). |
| Why do banks hold capital? | 1. Prevent failure; 2. Affect returns to owners; 3. Meet regulatory requirements. |
| Define ROA. | Net profit after taxes per dollar of assets. |
| Define ROE. | Net profit after taxes per dollar of equity capital. |
| Define equity multiplier (EM). | Assets per dollar of equity capital. |
| Relationship between ROE | ROA |
| What’s the trade-off in bank capital? | More capital → safer but lower ROE; less capital → riskier but higher ROE. |
| What is adverse selection? | High-risk borrowers are more likely to seek loans. |
| What is moral hazard? | Borrowers may take actions that increase risk after receiving a loan. |
| How do banks manage credit risk? | Screening |
| What is credit rationing? | Refusing loans or limiting loan size even at higher interest rates. |
| What is interest-rate risk? | Risk of earnings loss due to rate changes. |
| What is gap analysis? | Measures difference between rate-sensitive assets and liabilities: (RSA – RSL) × Δi = change in profits. |
| What is duration analysis? | Examines sensitivity of asset and liability market values to rate changes using weighted average duration. |
| What are off-balance-sheet activities? | Financial transactions affecting profits but not balance sheet (e.g. |
| What are loan sales? | Selling cash streams from loans to remove them from the balance sheet. |
| Examples of fee income? | Foreign exchange trades, servicing MBS, guarantees, backup credit lines. |
| Why are off-balance-sheet activities risky? | They increase exposure to credit and market risks without being recorded as assets/liabilities. |