History of banking Among many other things, the Code of Hammurabi from BC recorded interest-bearing loans. Banking began with the first prototype banks of merchants of the ancient world, which made grain loans to farmers and traders who carried goods between cities and this system is known as a barter system. This began around BC in Assyria and Babylonia.
Assets, Liabilities, and Bank Capital A balance sheet aka statement of condition, statement of financial position is a financial report that shows the value of a company's assets, liabilities, and owner's equity on a specific date, usually at the end of an accounting period, such as a quarter or a year.
An asset is anything that can be sold for value. A liability is an obligation that must eventually be paid, and, hence, it is a claim on assets. The owner's equity in a bank is often referred to as bank capital, which is what is left when all assets have been sold and all liabilities have been paid.
The relationship of the assets, liabilities, and owner's equity of a bank is shown by the following equation: By using liabilities, such as deposits or borrowings, to finance assets, such as loans to individuals or businesses, or to buy interest earning securities, the owners of the bank can leverage their bank capital to earn much more than would otherwise be possible using only the bank's capital.
Assets and liabilities are further distinguished as being either current or long-term. Current assets are assets expected to be sold or otherwise converted to cash within 1 year; otherwise, the assets are long-term aka noncurrent assets.
Current liabilities are expected to be paid within 1 year; otherwise, the liabilities are long-term aka noncurrent liabilities.
Working capital is the excess of current assets over current liabilities, a measure of its liquidity, meaning its ability to meet short-term liabilities: However, it should not be excessive, since capital in the form of long-term assets usually has a higher return.
The excess of the Liability of a banker long-term assets over Liability of a banker long-term liabilities is an indication of its solvencyits ability to continue as a going concern.
Uses of Funds Assets earn revenue for the bank and includes cash, securities, loans, and property and equipment that allows it to operate. Cash and Cash Equivalents One of the major services of a bank is to supply cash on demand, whether it is a depositor withdrawing money or writing a check, or a bank customer drawing on a credit line.
A bank also needs funds to pay bills, but while bills are predictable in both amount and timing, cash withdrawals by customers are not. Hence, a bank must maintain a certain level of cash compared to its liabilities to maintain solvency.
A bank must hold some cash as reserves, which is the amount of money held in a bank's account at the Federal Reserve Fed. The Federal Reserve determines the legal reserveswhich is the minimum amount of cash that banks must hold in their accounts to ensure the safety of banks and also allows the Fed to effect monetary policy by adjusting the reserve level.
Often, banks will keep excess reserves for greater safety. To do business at its branches and automated teller machines ATMsa bank also needs vault cash, which includes not only cash in its vaults, but also cash elsewhere on a bank's premises, such as in teller drawers, and the cash in its ATM machines.
Some banks, usually smaller banks, also have accounts at larger banks, called correspondent banks. This relationship makes lending expeditious because many of these smaller banks are rural and have excess reserves whereas the larger banks in the cities usually have a deficiency of reserves.
Another source of cash is cash in the process of collection. When a banks receives a check, it must present the check to the bank on which it is drawn for payment, and, previously, this has taken several days. Nowadays, checks are being processed electronically and many transfers of funds are being conducted electronically instead of using checks.
So this category of cash is diminishing significantly, and will probably disappear when all financial transactions finally become electronic. Cash equivalents are another short-term asset, so-called because they are nearly equivalent to cash: A primary characteristic of financial instruments that are classified as cash equivalents is that they have a short-term maturity of 3 months or less, so interest rate risk is minimal, and they are the most highly rated securities or issued by a government that can print its own money, such as the T-bills issued by the US government, so there is little credit risk.
Securities The primary securities that banks own are United States Treasuries and municipal bonds. These bonds can be sold quickly in the secondary market when a bank needs more cash, so they are often referred to as secondary reserves. The recent credit crisis has also underscored the fact that banks held many asset-backed securities as well.
United States banks are not permitted to own stocksbecause of their risk, but, ironically, they can hold much riskier securities called derivatives.
Loans Loans are the major asset for most banks. They earn more interest than banks have to pay on deposits, and, thus, are a major source of revenue for a bank.
Often banks will sell the loans, such as mortgagescredit card and auto loan receivablesto be securitized into asset-backed securities which can be sold to investors. Loans include the following major types:Imagine a great ship dominating the skyline on a distant sea.
Imagine the complexity of that ship: keel, ribs, planks, masts, spars, and an infinite number of less readily named components. A bank is a financial institution that accepts deposits from the public and creates credit.
Lending activities can be performed either directly or indirectly through capital monstermanfilm.com to their importance in the financial stability of a country, banks are highly regulated in most countries.
Most nations have institutionalized a system known as fractional reserve banking under which banks hold. How ship owners, brokers and operators can apply to MCA for passenger, bunker, tanker and wreck removal compulsory liability insurance certificates.
Asset And Liability Management: The Banker's Guide to Value Creation And Risk Control (Financial Times Series) [Jean Dermine, Youssef F. Bissada, E.
Mercier] on monstermanfilm.com *FREE* shipping on qualifying offers. Every banker who is in touch with their industry, and keen to progress, needs to know how banking activities contribute to value creation and how to ensure risks are controlled.
What is liability in banking? Update Cancel. Answer Wiki. 9 Answers. Then there are participation certificates, a new form of issuing banks’ liability about which we study in the next sub-section. Himanshu Goel, MBA XLRI, Corporate Banker SBI. Answered Jan 6. (1) Enter a city or ZIP code and hit "Next".
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