Role of Banks 14.3

Lecture 7

Payment system

helps the economy exchange goods and services in exchange for money and assets

Financial intermediary

An institution tat operates between a saver with financial assets ot invest and a borrower who will pay a rate of return for those assets.

Depositary Institution

Institutions that take deposit money then uses that money to make loans

Balance sheet

An accounting tool that lists assets and liabilities

Asset

Item of value that a firm or an individual owns

Liability

Any amount or debt that a firm or an individual owes

Net worth

the excess of asset value over and above the liability; total assets minus the total liabilities

Bank capital

a bank’s net worth

T-account

A balance sheet witha two-column format, with the T-shappe formed by the vertical line down the middle and the horizontal line under the column headings for “assets” and “liabilities”.

Reserves

Funds that a bank keeps, funds they do not loan out

Asset-liability time mismatch

One of the ways banks go bankrupt. It is the ability for customers to withdraw a bank’s loan in the short-term while they pay its assets in the long term

Diversify

A strategy to reduce risk. making investments with a range of firms so bank is not effected entirely by one or a few firms.