Study Notes on Bank Balance Sheets

Demand Deposit: A deposit that can be withdrawn by the account holder on demand, such as checking accounts where the funds are readily available.
Owners’ Equity: The residual interest in the assets of a bank after deducting liabilities; represents the net worth of the bank.
Total Reserves: The total amount of money held by a bank and can refer to both required and excess reserves.
Required Reserves: The minimum amount of reserves a bank must hold, dictated by the reserve requirement ratio.
Excess Reserves: The amount of reserves held by a bank that exceeds the required reserves; these can typically be loaned out.
Loans: Money that banks lend to borrowers, which must be repaid with interest.
Securities: Financial instruments that represent ownership positions, such as stocks, or creditor relationships, such as bonds.

Assets: Things of value owned by the bank.
- Demand Deposits: counted as assets because they can generate income for the bank through loans.
- Loans: considered assets because they represent money that will be paid back with interest.
- Securities: also assets as they can provide returns through interest payments.
Liabilities: Obligations of the bank to repay deposits or loans.
- Demand Deposits: counted as liabilities because the bank has a legal obligation to return these funds to depositors.

Bank balance sheets operate under the principle that Assets = Liabilities + Owners’ Equity.
- Example Interaction: When a customer deposits $100 into the bank, it becomes a demand deposit (liability) for the bank but also an asset since it is cash the bank can use to generate more income through loans.
- If the bank lends out $20 from the deposited $100, it retains $80 in cash and has the $20 loan as an asset.

A withdrawal reduces the amount of demand deposits liability on the bank's balance sheet but also decreases the amount of reserves.
If a customer withdraws $20 from their account:
- The bank would reduce its demand deposits by $20 and decrease its reserves accordingly by the same amount unless it has sufficient assets to cover the withdrawal.
- This transaction impacts the bank's ability to meet the reserve requirement if sufficient reserves are not maintained.

Total assets must equal total liabilities plus owners' equity:
- A bank examiner would confirm that for every dollar deposited, an equivalent dollar in liabilities (obligation to return deposits) matches against what the bank does with that money (loans, reserves, investments).

Reserve Requirement (rr): The percentage of deposits that a bank must hold in reserve and not lend out.
If the reserve requirement is set at 10%:
- For a $100 deposit, required reserves would be $10.
- The excess reserves are the remaining amount that can be used for loans or investments.

Calculating Loan Potential: If a bank has total deposits of $1,000 with a 10% reserve requirement:
- Required Reserves = $1,000 × 0.10 = $100
- Therefore, Excess Reserves = Total Reserves - Required Reserves.
Impact of Securities and Investments: If a bank decides to invest some excess reserves into government securities, it must ensure sufficient reserves remain to meet demand deposits and the required reserve ratio.

The calculations of required and excess reserves directly influence how much a bank can lend.
Knowledge of the bank’s balance sheet categories and their implications is essential for understanding banking operations and the broader economy, as lending practices affect economic growth and liquidity.