The Balance Sheet of Commercial Banks • Liabilities: Sources of Funds

– Checkable Deposits– Non-transactions Deposits– Borrowings

• discount loans • federal funds market.

• Assets: Uses of Funds – Cash Items

• reserves • cash items in process of collection • vault cash

– Securities• secondary reserves

– Loans

Web Page – Board of Governors

Bank Capital and Profitability• ROA = Net profit after taxes/Total bank assets

• ROE= Net profit after taxes/Bank capital

• Bank Risks• Liquidity Risk

– the risk of a sudden demand for liquid funds

• Credit Risk– a bank’s loans will not be repaid

• Interest-Rate Risk– Banks have short-term liabilities & long-term assets

• mismatch between the maturities of the two sides of the balance sheet creates interest-rate risk.

Bank Risks, continued– Trading Risk

• Buy HIGH – Sell low

– Foreign exchange risk

• Banks hold assets denominated in one currency and liabilities denominated in another

– Sovereign risk

• Some foreign borrowers may not repay their loans because their government prohibits them from doing so.

– Operational risk