econ 3229 ch 9
Terms in this set (41)
are bank accounts that allow the owner
of the account to write checks to third parties. Checkable deposits include all accounts on which checks can be drawn.
are the primary source of bank
funds (58% of bank liabilities in Table 1). Owners cannot write checks on nontransaction deposits, but the interest rates paid on these deposits are usually higher than those on checkable deposits. There are two basic types of nontransaction deposits: savings accounts and time deposits (also called certificates of deposit, or CDs).
Funds can be added to or withdrawn from savings accounts at any time. For these accounts, transactions and interest payments are recorded in a monthly statement or in a passbook held by the owner of the account.
time deposits (CDs)
have a fixed maturity length, ranging from several months to over
five years, and assess substantial penalties (the forfeiture of several months' interest) for early withdrawal of funds.
two types: small and large denomination
deposits (deposits of less than
$100,000) are less liquid for the depositor than passbook savings, earn higher interest rates, and are a more costly source of funds for the banks.
are available in denominations of
$100,000 or more and are typically bought by corporations or other banks. Large-denomination CDs are negotiable; like bonds, they can be resold in a secondary market
before they mature.
* banks can hold these as assets
Banks also obtain funds by borrowing from the Federal Reserve System,
the Federal Home Loan banks, other banks, and corporations.
Borrowings from the
The final category on the right-hand side of the balance sheet is bank
capital, or the bank's net worth, which equals the difference between total assets and
Checkable Deposits, Nontransaction Deposits, Borrowings, Bank Capital
Reserves, Cash items in process of collection, Depostis at other banks, Securities, Loans, Other Assets
consist of these deposits plus currency that is physically held by banks
called vault cash
cash held in banks overnight vaults
the amount of funds that a bank must hold in reserve against deposits made by there customers
the fraction of banks eposits that ust be held in cash or on deposits in a federal reserve bank
Required Reserve Ratio
the liquid assets that a central bank or other body mandates that a bank keep at all times
Capital Reserves held by a bank or financial institution in excess of what is required
Cash items in process of collection
when a check is deposited from one bank to another but the receiving bank has not yet acquired the physical funds the check is classified as a cash item in process of collection and is an asset
small banks hold deposits in larger banks in exchange for a variety of services such as check collection, foreign exchange transactions and help with securities purchases
are deposits at other banks and cash items in process of collection
are important income - earning assets
- banks are not allowed to hold stock
3 categories of securities
1. U.S. Government and agency securities ( most liquid)
2. State and local securities
3. other securities
high liquidity, short-term U.S. government securities
Banks make their profits primarily by issuing loans.
- A loan is a liability for the individual or corporation receiving it, but an asset for a bank, because it provides income to the bank.
The physical capital (bank buildings, computers, and other equipment)
owned by banks is included
banks make profits by selling liabilities with one set of characteristics (a particular combination of liquidity, risk, size, and return) and using the proceeds to buy assets with a different set of characteristics.
a simplified balance sheet, with lines in the form of a T, that lists only the changes that occur in balance sheet items starting from some initial balance sheet position.
when deposits are lost
because depositors make withdrawals and demand payment.
the acquisition of assets that
are liquid enough to meet the bank's obligations to depositors.
bank manager must pursue an acceptably low level of risk by acquiring assets that have a low
rate of default and by diversifying asset holdings
manager's third concern is acquiring funds at low cost
Capital Adequacy management
the manager must decide the amount of capital the bank should maintain and then acquire the needed capital
cost associated with discount loans is the interest rate that must be paid to the Fed
Return on assets
Net profit after taxes/assets
-The return on assets provides information on how efficiently a bank is being run because it indicates how much profit is generated, on average, by each dollar of assets.
return on equity
net profit after taxes/equity capital
-which measures how well the owners are doing on their investment)
-amount of assets per dollar of equity capital
lower bank capital
typically results in higher return for the owners of the bank
off Balance-sheet activities
involve trading financial instruments and generating income from fees and loan sales, activities that affect bank profits but do not appear on bank balance sheets
also called a secondary loan participation, involves a contract that sells all or part of the cash stream from a specific loan and thereby removes the loan so that it is no longer an asset on the bank's balance sheet.
off balance sheet activity that generates income through different fees