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Money and Banking

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Money & Banking ­ MGT411
VU
Lesson 23
BANKING
Banking
Types of banks
Balance Sheet of Commercial Banks
Assets
Liabilities
Banking
Banking is a combination of businesses designed to deliver the services
Pool the savings of and making loans
Diversification
Access to the payments system
Accounting and record-keeping
The intent of banks is to profit from each of these lines of business
There are three basic types of depository institutions:
Commercial banks,
Savings institutions
Credit unions
Commercial banks
They accept deposits and use the proceeds to make consumer, commercial and real estate loans.
Community banks
Small local banks focused on serving consumers and small business
Regional and Super-regional banks
They make consumer, residential, commercial and industrial loans
Money center bank
These banks rely more on borrowing for their funding
Saving Institutions
Financial intermediaries to serve households and individuals
Provide mortgage and lending as well as saving deposit services
Credit Unions
Nonprofit depository institutions that are owned by people with a common bond
These unions specialize in making small consumer loans
The Balance Sheet of Commercial Banks
Balance Sheet Identity
Total Bank Assets = Total Bank Liabilities + Bank Capital
Banks obtain funds from individual depositors and business as well as by borrowing from other
financial institutions and through the financial markets.
They use these funds to make loans, purchase marketable securities and hold cash.
The difference between a bank's assets and liabilities is the bank's capital or Net Worth
The bank's profits come both from service fees and the difference between interest earned and
interest paid.
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Money & Banking ­ MGT411
VU
ITEMS
2005 (Rs.000)
2004 (Rs.000)
ASSETS
Cash and balances with treasury banks
23,665,549
23,833,253
Balances with other banks
1,469,333
5,708,323
Lendings to financial institutions
9,998,828
10,965,297
Investments ­ net
69,481,487
67,194,971
Advances ­ net
180,322,753
137,317,773
Other assets ­ net
5,464,426
6,154,370
Operating fixed assets
8,182,454
7,999,821
Deferred tax assets - net
191,967
_________
298,776,797
259,173,808
LIABILITIES
7,566,684
Bills payable
8,536,674
7,590,864
Borrowings from financial institutions
27,377,502
221,069,158
Deposits and other accounts
229,345,178
1,598,720
Sub-ordinated loan
1,598,080
----
Liabilities against assets subject to finance lease
-----
6,525,999
Other liabilities
8,611,600
269,499
Deferred tax liabilities - net
________
275,469,034
244,620,924
NET ASSETS
23,307,763
14,552,884
REPRESENTED BY:
3,371,800
Share capital
4,265,327
5,661,553
Reserves
13,408,005
165,208
Unappropriated profit
210,662
17,883,994
9,198,561
5,423,769
5,354,323
Surplus on revaluation of assets - net of tax
23,307,763
14,552,884
Balance Sheet of U.S Commercial Banks, August 2004
Assets in billions of dollars(numbers in parentheses are %age of total assets)
321.6
(4.1)
Cash items (including reserves)
1,893.5
(23.9)
Securities
1,1707.7  (14.8)
o  U.S. Government and agency
722.8
(9.1)
o  State and local government and other
5,044.6
(63.7)
Loans
887.1
(11.2)
o  Commercial and industrial
2,411.6
(30.5)
o  Real estate (including mortgage)
672.3
(8.5)
o  Consumer
364.7
(4.6)
o  Interbank
708.9
(9.0)
o  Other
655.1
(8.3)
Other assets
Total Commercial Bank Assets
7,914.8
Liabilities in billions of dollars (numbers in parentheses are %age of total liabilities)
645.0
(8.9)
Checkable deposits
4,487.7  (62.3)
Nontransactions deposits
3,340.9  (46.3)
o  Savings deposits and time deposits
1,146.8  (15.9)
o  Large, negotiable time deposits
1,589.0  (22.0)
Borrowings
459.1
(6.4)
o  From banks in U.S.
1,129.9  (15.7)
o  From nonbanks in U.S.
487.4
(6.8)
Other liabilities
Total Commercial Bank Liabilities
7,209.1
Bank assets ­ Bank Liabilities = Bank Capital
705.7
75
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Money & Banking ­ MGT411
VU
Assets: Uses of Funds
Cash Items
Reserves
Cash items in process of collection
Vault cash
Securities
Secondary reserves
Loans
Cash Items
Reserves
Includes cash in the bank's vault and its deposits at the central bank
Held to meet customers' withdrawal requests
Cash items in the process of collections
Uncollected funds the bank expects to receive
The balances of accounts that banks hold at other banks (correspondent banking)
Because cash earns no interest, it has a high opportunity cost. So banks minimize the amount of
cash holding
Securities:
Stocks
T-Bills
Government and corporate bonds
Securities are sometimes called secondary reserves because they are highly liquid and can be
sold quickly if the bank needs cash.
Loans:
The primary asset of modern commercial banks;
Business loans (commercial and industrial loans),
Real estate loans,
Consumer loans,
Inter-bank loans,
Loans for the purchase of other securities
The primary difference among the various types of depository institutions is in the composition
of their loan portfolios
Commercial banks make loans primarily to business
Savings and loans provide mortgages to individuals
Credit unions specialize in consumer loans
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Table of Contents:
  1. TEXT AND REFERENCE MATERIAL & FIVE PARTS OF THE FINANCIAL SYSTEM
  2. FIVE CORE PRINCIPLES OF MONEY AND BANKING:Time has Value
  3. MONEY & THE PAYMENT SYSTEM:Distinctions among Money, Wealth, and Income
  4. OTHER FORMS OF PAYMENTS:Electronic Funds Transfer, E-money
  5. FINANCIAL INTERMEDIARIES:Indirect Finance, Financial and Economic Development
  6. FINANCIAL INSTRUMENTS & FINANCIAL MARKETS:Primarily Stores of Value
  7. FINANCIAL INSTITUTIONS:The structure of the financial industry
  8. TIME VALUE OF MONEY:Future Value, Present Value
  9. APPLICATION OF PRESENT VALUE CONCEPTS:Compound Annual Rates
  10. BOND PRICING & RISK:Valuing the Principal Payment, Risk
  11. MEASURING RISK:Variance, Standard Deviation, Value at Risk, Risk Aversion
  12. EVALUATING RISK:Deciding if a risk is worth taking, Sources of Risk
  13. BONDS & BONDS PRICING:Zero-Coupon Bonds, Fixed Payment Loans
  14. YIELD TO MATURIRY:Current Yield, Holding Period Returns
  15. SHIFTS IN EQUILIBRIUM IN THE BOND MARKET & RISK
  16. BONDS & SOURCES OF BOND RISK:Inflation Risk, Bond Ratings
  17. TAX EFFECT & TERM STRUCTURE OF INTEREST RATE:Expectations Hypothesis
  18. THE LIQUIDITY PREMIUM THEORY:Essential Characteristics of Common Stock
  19. VALUING STOCKS:Fundamental Value and the Dividend-Discount Model
  20. RISK AND VALUE OF STOCKS:The Theory of Efficient Markets
  21. ROLE OF FINANCIAL INTERMEDIARIES:Pooling Savings
  22. ROLE OF FINANCIAL INTERMEDIARIES (CONTINUED):Providing Liquidity
  23. BANKING:The Balance Sheet of Commercial Banks, Assets: Uses of Funds
  24. BALANCE SHEET OF COMMERCIAL BANKS:Bank Capital and Profitability
  25. BANK RISK:Liquidity Risk, Credit Risk, Interest-Rate Risk
  26. INTEREST RATE RISK:Trading Risk, Other Risks, The Globalization of Banking
  27. NON- DEPOSITORY INSTITUTIONS:Insurance Companies, Securities Firms
  28. SECURITIES FIRMS (Continued):Finance Companies, Banking Crisis
  29. THE GOVERNMENT SAFETY NET:Supervision and Examination
  30. THE GOVERNMENT'S BANK:The Bankers' Bank, Low, Stable Inflation
  31. LOW, STABLE INFLATION:High, Stable Real Growth
  32. MEETING THE CHALLENGE: CREATING A SUCCESSFUL CENTRAL BANK
  33. THE MONETARY BASE:Changing the Size and Composition of the Balance Sheet
  34. DEPOSIT CREATION IN A SINGLE BANK:Types of Reserves
  35. MONEY MULTIPLIER:The Quantity of Money (M) Depends on
  36. TARGET FEDERAL FUNDS RATE AND OPEN MARKET OPERATION
  37. WHY DO WE CARE ABOUT MONETARY AGGREGATES?The Facts about Velocity
  38. THE FACTS ABOUT VELOCITY:Money Growth + Velocity Growth = Inflation + Real Growth
  39. THE PORTFOLIO DEMAND FOR MONEY:Output and Inflation in the Long Run
  40. MONEY GROWTH, INFLATION, AND AGGREGATE DEMAND
  41. DERIVING THE MONETARY POLICY REACTION CURVE
  42. THE AGGREGATE DEMAND CURVE:Shifting the Aggregate Demand Curve
  43. THE AGGREGATE SUPPLY CURVE:Inflation Shocks
  44. EQUILIBRIUM AND THE DETERMINATION OF OUTPUT AND INFLATION
  45. SHIFTS IN POTENTIAL OUTPUT AND REAL BUSINESS CYCLE THEORY