Banking and Insurance · Ch 1 — Commercial Banking
Balance Sheet of a Commercial Bank
Balance Sheet of a Commercial Bank
The balance sheet of a commercial bank is a statement, drawn up at a particular date, that shows what the bank owes (its liabilities) and what it owns (its assets). It is the clearest single picture of a bank's financial position, and its structure reveals the central problem every banker must solve: how to earn a profit from lending and investing while still being able to repay depositors whenever they ask for their money.
On the liabilities side stand the claims of others against the bank; on the assets side stand the bank's own resources and the claims it holds against others. A simplified form of a commercial bank's balance sheet is shown below.
| Liabilities | Assets |
|---|---|
| Share capital (paid-up capital) | Cash in hand |
| Reserve fund and surplus | Balances with the central bank and other banks |
| Deposits (current, savings, fixed, recurring) | Money at call and short notice |
| Borrowings from other banks / the central bank | Bills discounted and purchased |
| Bills payable | Investments (government and other securities) |
| Other liabilities and provisions | Loans, advances, cash credit and overdrafts |
| Fixed assets (premises, furniture) | |
| Other assets |
Understanding the two sides:
- Deposits are usually the largest liability, because the bulk of a bank's working funds come from the public. They must be repaid, so they are a liability even though the bank uses them to earn income.
- Share capital and reserves are the owners' own stake and act as a cushion that absorbs losses and protects depositors.
- Cash in hand and balances with the central bank are the bank's most liquid assets — they earn little or nothing but are held to meet withdrawals and the reserve requirements imposed by law.
- Money at call and short notice and bills discounted are highly liquid earning assets that can be turned into cash quickly.
- Investments in government and other securities earn a steady, safe return and can be sold if cash is needed.
- Loans and advances are the least liquid but the most profitable assets — this is where the bank earns most of its income, and also where it takes most of its risk. …
A statement at a given date showing a commercial bank's liabilities (what it owes, chiefly deposits and capital) and its assets (what it owns and what is owed to it, such a …
Very short-term loans a bank makes to other banks or institutions, repayable on demand or at very short notice — a highly …