1. Banking Industry
Number of banks ~7,000 decreasing (result of consolidation, deregulation and failures)
Number of branches ~90,000 (result of relaxed geographical restrictions, but now peaking out)
About 4,000 are small banks (< $100 million in assets)
The large banks in our economy have gotten that way by mergers and acquisitions.

2. Banks vs. Branches ( )

3. Commercial Bank Sector Balance Sheet
Uses of Funds Sources of Funds
(Assets) (Liabilities + Capital)
Cash Assets (8%) Deposit Liabilities (69%)
FF sold/Rev repos (4%) Borrowed Funds (16%)
Investments (19%) Other Liabilities (3%)
Loans & Leases (55%) Subordinated Notes & Deben (1%)
Premises (1%) Capital Accounts (11%)
Other (13%)
(See pp. 411 & 417)

4. First Three Items on Left
Cash Assets (8%):
Vault cash (physical currency)
Reserves at the Fed
Fed Funds Sold/Rev repos (4%):
Fed Funds sold
Reverse Repurchase Agreements
Investments (19%): cushion in case need more liquidity
U.S. Treasury securities
Agency securities
Municipal bonds

5. Fourth Item on Left
Loans and Leases (55%): where banks make their money
Loans
commercial and industrial
real estate
agricultural
consumer
Leases
fast-growing line of business for the big banks
fleet assets (aircraft, ships,..), rolling stock (railroad cars, trucks,..), equipment (cranes, generators,..)

6. First Two Items on Right
Deposit Liabilities (69%):
Transaction Deposits
Savings Deposits
Time Deposits (retail and negotiable CDs)
Borrowed Funds (16%):
Fed Funds purchased
Repurchase Agreements
Eurodollars (dollars borrowed abroad)
Discount Window loans

7. Last Two Items on Right Subordinated Notes and Debentures (1%)
Subordinated to claims of depositors
Capital Accounts (11%)
Paid-in capital (from sale of stock)
Retained earnings

8. Capital Adequacy Capital adequacy ratio:
Numerator is Subordinated Notes & Debentures Paid-in capital + Retained earnings
Denominator is a weighted average of assets
Riskfree, weight of 0.0
Very risky assets like CDOs, weight of 1.0
Everything else, weight in between

9. Five ‘C’s of Credit Five “C”s of Credit:
Character (willingness to pay)
Capacity (cash flow)
Capital (wealth or net worth)
Collateral (security for the loan)
Conditions (economic conditions)

10. Base Rate Pricing
Markups to base rate include adjustments for default risk, term-to-maturity, and competitive factors.
rL = BR + DR + TM + CF
In this way, business loans can vary from customer to customer.
BR could be prime rate, Libor, or a T-bill rate.
Loan pricing is one of most important managerial decisions in banking.

11. Things for Final Last third of course: 5 Cs 3 base rate adjustments
What TIPS stands for
6 types of MM instruments
Names of 3 ratings agencies
Latest National Debt and Social Security Trust fund figures
trillion = 19 trillion
2.8 trillion
Other numbers:
3.8 trillion
500 billion (approx)
Know meaning of the word “notional” as regards CDSs
Know about Commodity Futures Modernization Act (2000)
Questions end Dec 7 midnight.