Bank Sources of Funds --
        Liabilities and Capital (continued)
             Capital Notes and Bonds -- Nondeposit,
              noninsured, subordinated long-term notes and
              bonds.
             Bank Capital Accounts
                – a source of funds.
                – an equity base for deposits.
                – a residual, at risk source of funds from
                  shareholders that is used to absorb losses and
                  protect depositors.



Fin 421 - Commercial Bank Operations                               1
Liabilities and Capital 9/30/2010
                                                                           Small      Medium-Sized    Large
                                         All Insured Commercial  Banksa   Banksb         Banksc      Banksd
                                                                   e              e             e            e
Liabilities and Capital Accounts          Billions        Percent         Percent       Percent      Percent
Liabilities
Deposits, Total                              $8,373         69               84           83            67
 Noninterest-bearing                         $1,634         13               14           12            14
 Interest-bearing                            $6,739         56               71           71            54
Borrowed Funds, Total                        $1,902         16                3           6             17
 Federal funds purchased and
 securities sold under
 Repurchase Agreements                        $565           5               0             2            5
 Trading liabilities                          $318           3               0             0            3
 Other borrowed money                        $1,019          8               3             4            9
Subordinated notes and
debentures                                     $149          1               0             0            1
All other liabilities                          $328          3               1             1            3

Total liabilities                           $10,752         89               88           90            89

Capital Accounts
Common and Preferred Stock                   $1,091          9               7             6            9
Undivided profits                             $288           2               5             4            2

Total equity capital                         $1,379         11               12           10            11

Total liabilities and equity
capital                                     $12,130         100             100           100          100

Number                                         6622                        2383          3731          508

  Fin 421 - Commercial Bank Operations                                                                       2
Liabilities and Capital (1955-2010)




Fin 421 - Commercial Bank Operations          3
Uses of Funds -- Bank Assets

             Cash assets
             Federal Funds sold represent excess reserves
              sold to other banks for a short period of time.
             Bank investments provide income and liquidity.
                – U.S. Treasury securities offer safety, liquidity,
                  collateral, and income.
                – U.S. government agency securities provide safety
                  and income.
                – Municipal securities provide income and a tax
                  shield.

Fin 421 - Commercial Bank Operations                              4
Bank loans

             Loans are generally more risky than the
              investment portfolio.
             Bank loans consist of promissory notes -- a
              financial asset similar to securities.
             Banks make fixed rate or floating rate loans.
             Many loans are secured by collateral; others are
              unsecured.




Fin 421 - Commercial Bank Operations                         5
Commercial and industrial loans
        represent the major loan category
        of banks.
             Bridge loans -- a business financing agreement
              with repayment coming from the completion of
              the agreement.
             Seasonal loans -- financing of varying working
              capital needs over a year with repayment coming
              from the reduction in working capital.
             Long-term asset loans -- financing equipment
              over several years with repayment coming from
              future profits and cash flows of the borrower.

Fin 421 - Commercial Bank Operations                       6
Other Loans

             Loans to depository institutions -- loans to
              respondent banks, S&Ls, and foreign banks.
             Real estate loans -- fixed or variable rate long-
              term loans
                – residential mortgage loans
                – commercial and industrial loans




Fin 421 - Commercial Bank Operations                              7
Other Loans (concluded)

             Consumer loans to individuals
                – most are paid back in installments
                – includes credit card and purchase credit
             Bank Credit Cards -- credit extended to
              consumer at the time of purchase and/or cash
              advance:
                – once local, credit card networks are now
                  worldwide
                – bank earns fees from annual fee, merchant
                  discount and interest on revolving credit balances

Fin 421 - Commercial Bank Operations                               8

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Slidecasttest

  • 1. Bank Sources of Funds -- Liabilities and Capital (continued)  Capital Notes and Bonds -- Nondeposit, noninsured, subordinated long-term notes and bonds.  Bank Capital Accounts – a source of funds. – an equity base for deposits. – a residual, at risk source of funds from shareholders that is used to absorb losses and protect depositors. Fin 421 - Commercial Bank Operations 1
  • 2. Liabilities and Capital 9/30/2010 Small Medium-Sized Large All Insured Commercial Banksa Banksb Banksc Banksd e e e e Liabilities and Capital Accounts Billions Percent Percent Percent Percent Liabilities Deposits, Total $8,373 69 84 83 67 Noninterest-bearing $1,634 13 14 12 14 Interest-bearing $6,739 56 71 71 54 Borrowed Funds, Total $1,902 16 3 6 17 Federal funds purchased and securities sold under Repurchase Agreements $565 5 0 2 5 Trading liabilities $318 3 0 0 3 Other borrowed money $1,019 8 3 4 9 Subordinated notes and debentures $149 1 0 0 1 All other liabilities $328 3 1 1 3 Total liabilities $10,752 89 88 90 89 Capital Accounts Common and Preferred Stock $1,091 9 7 6 9 Undivided profits $288 2 5 4 2 Total equity capital $1,379 11 12 10 11 Total liabilities and equity capital $12,130 100 100 100 100 Number 6622 2383 3731 508 Fin 421 - Commercial Bank Operations 2
  • 3. Liabilities and Capital (1955-2010) Fin 421 - Commercial Bank Operations 3
  • 4. Uses of Funds -- Bank Assets  Cash assets  Federal Funds sold represent excess reserves sold to other banks for a short period of time.  Bank investments provide income and liquidity. – U.S. Treasury securities offer safety, liquidity, collateral, and income. – U.S. government agency securities provide safety and income. – Municipal securities provide income and a tax shield. Fin 421 - Commercial Bank Operations 4
  • 5. Bank loans  Loans are generally more risky than the investment portfolio.  Bank loans consist of promissory notes -- a financial asset similar to securities.  Banks make fixed rate or floating rate loans.  Many loans are secured by collateral; others are unsecured. Fin 421 - Commercial Bank Operations 5
  • 6. Commercial and industrial loans represent the major loan category of banks.  Bridge loans -- a business financing agreement with repayment coming from the completion of the agreement.  Seasonal loans -- financing of varying working capital needs over a year with repayment coming from the reduction in working capital.  Long-term asset loans -- financing equipment over several years with repayment coming from future profits and cash flows of the borrower. Fin 421 - Commercial Bank Operations 6
  • 7. Other Loans  Loans to depository institutions -- loans to respondent banks, S&Ls, and foreign banks.  Real estate loans -- fixed or variable rate long- term loans – residential mortgage loans – commercial and industrial loans Fin 421 - Commercial Bank Operations 7
  • 8. Other Loans (concluded)  Consumer loans to individuals – most are paid back in installments – includes credit card and purchase credit  Bank Credit Cards -- credit extended to consumer at the time of purchase and/or cash advance: – once local, credit card networks are now worldwide – bank earns fees from annual fee, merchant discount and interest on revolving credit balances Fin 421 - Commercial Bank Operations 8