Banking and the Management of Financial Institutions

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Banking and the Management of Financial
Institutions

• Banks (depository institutions) supply more than
  5 trillion in credit annually in the U.S..
• Banks provide other services such as checking and
  savings account.

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How banking works

• The banks balance sheet
• Total assets total liabilities capital
• Liabilities(sources of funds)
• Checkable deposits demand deposits, NOW
  accounts, MMDAs.
• Nontransaction deposits savings accounts, CDs.
• Borrowings discount loans, federal funds

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CONTINUED

• Bank capital(sources of funds)
• Assets(uses of funds)
• Reserves
• Cash items in process of collection
• Deposits of other banks
• Securities
• Loans
• Other assets

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Basic Banking

• Banks make profits by selling liabilities (by
  combining liquidity, risk, size, return) and
  using the proceeds to buy assets.
• The process of asset transformation
• The bank borrows short and lends long
• Providing check clearing, record keeping, credit
  analysis, and so forth.
• Example a T-account presentation

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Assets Liabilities
Required reserves 10 Excess reserves 90 Checkable deposits 100
Assets Liabilities
Required reserves 10 Loans 90 Checkable deposits 100