Balance sheet of banks

What is the main goal of a commercial bank?

To maximise profit.

What is a commercial bank's primary source of income?

Interest earned on loans and investment securities.

What are the main expenses for a commercial bank?

Interest paid on deposits and borrowed funds, plus salaries and employee benefits, rent, IT, etc.

What does a bank’s balance sheet show?

Assets, liabilities, and the owners' equity (capital).

What are liabilities and capital in a bank?

They are the sources of the bank’s funds.

What are assets in a bank?

They are how the bank uses its funds.

What is the principal source of funds for banks?

Deposit accounts (demand, savings, and term deposits).

Why do large banks rely more on borrowed funds?

Because loan demand has grown faster than deposits.

What do banks do when deposit growth isn’t enough to meet loan demand?

They borrow funds from other sources.

What are transaction accounts (demand deposits)?

Accounts where funds can be accessed on demand, like via EFTPOS, cheques, or banking apps. This is the lowest cost source of bank funds.

Why are transaction accounts considered the lowest-cost source of funds for banks?

Because they pay little to no interest.

What are savings accounts?

Interest-bearing accounts held by individuals or partnerships.

What are time (term) deposits?

Deposits locked in until a maturity date and cannot be transferred.

What are borrowed funds for banks?

Short-term funds borrowed from central banks, other banks, or money markets.

what are 3 types of borrowed funds?

bankers acceptance, debt issues, loan capital

What is a banker’s acceptance?

A bank-guaranteed draft drawn by a corporation to raise funds, promising future payment.

what are debt issues?

short-and long term instruments that raise funds from the public that they promise to repay with interest.

What are examples of debt issues used by banks to raise funds?

Commercial papers, debentures, unsecured notes (like euronotes and eurobonds), repos, and covered bonds.

What is loan capital?

Long-term borrowed funds like subordinated notes and debentures.

What is a covered bond?

A bond backed by a pool of assets (like mortgages) that protects investors if the bank fails.

What are the main components of bank capital?

Share capital, retained profits, and reserve accounts.

What is share capital?

Money raised from issuing common or preferred shares

What are retained profits?

Profits that the bank has earned and not paid out as dividends.

What are reserve accounts used for?

To cover expected loan and investment losses or asset revaluations.

What is the purpose of bank capital?

To absorb losses and protect depositors when asset values fall.

How do banks use their funds?

By issuing loans and purchasing investments.

What are investment securities for banks?

Debt instruments bought from large borrowers, often resold in secondary markets.

What are asset reserves?

Funds held at the central bank or as vault cash for regulatory and liquidity purposes.

Do reserves earn interest?

No, they are held because of regulation requirement and for liquidity management, not for profit.

what are the banks assets?

Reserves, securities, loans, other assets (tangible assets e.g. bank buildings computers)

how do banks primarily make profit?

By issuing loans, these are less liquid than other assets.

What is off-balance-sheet banking?

Banking activities that affect profits but do not appear on the bank’s balance sheet.

What are examples of off-balance-sheet activities?

Trading financial instruments, generating income from fees and loan brokerage

What is fee income?

Income banks earn from providing special services to customers.

What are examples of services that generate fee income?

Foreign exchange trades, letters of credit, and loan commitment

What risks do guarantee services create for banks?

They increase default and liquidity risks.

What is a loan commitment?

A formal promise by a bank to lend money under certain terms.

What are the three main types of loan commitments?

Lines of credit, term loans, and revolving credit facilities.

What is a line of credit?

A short-term agreement allowing borrowing up to a limit.

What is a term loan?

A loan for a fixed amount over a period longer than a year

What is a revolving credit facility?

A loan where the borrower can borrow, repay, and borrow again during the loan period.

What are contingent assets?

Off-balance-sheet activities that may become bank assets later (e.g. loan commitments, unrealised gains on derivatives).

What are contingent liabilities?

Off-balance-sheet activities that may become obligations (e.g. letters of credit, unrealised losses on derivatives).

What are trading activities in banking?

Banks participate in markets for interest rate and currency forwards, futures, options and swaps.

What are derivative securities?

Financial instruments like forwards, futures, options, and swaps.

Why do banks trade in derivatives?

To hedge risks, speculate on changes in rates or currencies, or act as a counterparty.