Chapter10BankingandtheManagementofFinancialInstitutions©2013PearsonEducation,Inc.Allrightsreserved.10-2TheBankBalanceSheet•Liabilities–Checkabledeposits–Nontransactiondeposits–Borrowings–Bankcapital©2013PearsonEducation,Inc.Allrightsreserved.10-3TheBankBalanceSheet(cont’d)•Assets–Reserves–Cashitemsinprocessofcollection–Depositsatotherbanks–Securities–Loans–Otherassets©2013PearsonEducation,Inc.Allrightsreserved.10-4Table1BalanceSheetofAllCommercialBanks(itemsasapercentageofthetotal,June2011©2013PearsonEducation,Inc.Allrightsreserved.10-5BasicBanking:CashDeposit•Openingofacheckingaccountleadstoanincreaseinthebank’sreservesequaltotheincreaseincheckabledepositsFirstNationalBankFirstNationalBankAssetsLiabilitiesAssetsLiabilitiesVaultCash+$100Checkabledeposits+$100Reserves+$100Checkabledeposits+$100©2013PearsonEducation,Inc.Allrightsreserved.10-6BasicBanking:CheckDepositWhenabankreceivesadditionaldeposits,itgainsanequalamountofreserves;whenitlosesdeposits,itlosesanequalamountofreservesFirstNationalBankSecondNationalBankAssetsLiabilitiesAssetsLiabilitiesReserves+$100Checkabledeposits+$100Reserves-$100Checkabledeposits-$100FirstNationalBankAssetsLiabilitiesCashitemsinprocessofcollection+$100Checkabledeposits+$100©2013PearsonEducation,Inc.Allrightsreserved.10-7BasicBanking:MakingaProfit•Assettransformation:sellingliabilitieswithonesetofcharacteristicsandusingtheproceedstobuyassetswithadifferentsetofcharacteristics•ThebankborrowsshortandlendslongFirstNationalBankFirstNationalBankAssetsLiabilitiesAssetsLiabilitiesRequiredreserves+$100Checkabledeposits+$100Requiredreserves+$100Checkabledeposits+$100Excessreserves+$90Loans+$90©2013PearsonEducation,Inc.Allrightsreserved.10-8GeneralPrinciplesofBankManagement•LiquidityManagement•AssetManagement•LiabilityManagement•CapitalAdequacyManagement•CreditRisk•Interest-rateRisk©2013PearsonEducation,Inc.Allrightsreserved.10-9LiquidityManagement:AmpleExcessReserves•Supposebank’srequiredreservesare10%•Ifaban...
