McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 12 Depository Institutions: Banks and Bank Management

12-2 The Balance Sheet of Commercial Banks Balance Sheet Identity Total Bank Assets = Total Bank Liabilities + Bank Capital

12-3 Web Page – Board of Governors

12-4 The Balance Sheet of Commercial Banks Assets: Uses of Funds Cash Items reserves cash items in process of collection vault cash Securities secondary reserves Loans

12-5 The Balance Sheet of Commercial Banks

12-6 The Balance Sheet of Commercial Banks Liabilities: Sources of Funds Checkable Deposits Non-transactions Deposits Borrowings discount loans federal funds market.

12-7 The Balance Sheet of Commercial Banks

12-8

12-9 The Balance Sheet of Commercial Banks Bank Capital and Profitability bank capital ROA = Net profit after taxes Total bank assets ROE= Net profit after taxes Bank capital

12-10

12-11 Bank Risk Liquidity Risk the risk of a sudden demand for liquid funds

12-12 Bank Risk

12-13 Bank Risk

12-14 Bank Risk

12-15 Bank Risk

12-16 Bank Risk Credit Risk a bank’s loans will not be repaid

12-17 Bank Risk Interest-Rate Risk bank's liabilities tend to be short-term, while its assets tend to be long-term. This mismatch between the maturities of the two sides of the balance sheet creates interest- rate risk.

12-18

12-19 Bank Risk Trading Risk If the price at which an instrument is purchased differs from the price at which it is sold, the risk is that the instrument may go down in value rather than up. This type of risk is called trading risk

12-20 Bank Risk Other Risks Foreign exchange risk comes from holding assets denominated in one currency and liabilities denominated in another Sovereign risk arises from the fact that some foreign borrowers may not repay their loans, not because they are unwilling to, but because their government prohibits them from doing so. operational risk

12-21

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 12 Depository Institutions: Banks and Bank Management