The Economics of Banking

MIRIAM BELLE A. ABARQUEZ

Financial System
 The Basics of Commercial Banking

•Commercial banking - is a business.

•Banks fill a market need by providing a service and earn a
profit by charging customers for that service.
•Taking in deposits from savers and making loans to households
and firms - is the key of commercial banking activities
 The Basics of Commercial Banking

•Balance sheet - is a statement that shows an

individual’s or a firm’s financial position on a
particular day.
The Basics of Commercial Banking

•Balance sheet
Components
1. Assets

2. Liabilities

3. Shareholder equity
Assets = Liabilities + Shareholders’ equity
 The Basics of Commercial Banking
1. Assets
• Something of value that an individual or a firm
owns; in particular, a financial claim.

• Example of bank assets:

1. Cash
2. Government securities
3. Interest-earning loans (mortgages, letters of credit, and
inter-bank loans)
 The Basics of Commercial Banking
2. Liabilities
• Something that an individual or a firm owes, particularly a
financial claim on an individual or a firm.
• Example of liabilities
1. Interest payments to other banks.
2. Mortgage payments for building.
3. Savings account interest due to customers.
4. Stock distributions.
5. Bills Payable
1. BSP (Rediscounting and Other Advances)
2. Interbank Loans Payable
3. Other Deposit Substitutes
 The Basics
3. Shareholders’ of
equity Commercial Banking
• is the difference between the value of a firm’s assets
and the value of its liabilities
• represents the dollar amount the owners of the firm
would be left with if the firm were to be closed, its assets
sold, and its liabilities paid off.
• For a public firm, the owners are the shareholders.
• is also referred to as the firm’s net worth
• Example of Shareholder’s equity
1. Capital Stock

2. Retained Earnings
 BDO UNIBANK
INC
Published Balance Sheet
Amounts in Philippine Pesos
As of 30 June 2022

Source: https://www.bsp.gov.ph/Statistics/Financial%20Statements/Commercial/BDO%20UNIBANK%20INC.aspx
 BDO UNIBANK
INC
Published Balance Sheet
Amounts in Philippine Pesos
As of 30 June 2022

Source: https://www.bsp.gov.ph/Statistics/Financial%20Statements/Commercial/BDO%20UNIBANK%20INC.aspx
 Main types of deposit account
1. Checkable Deposits -which are accounts against which depositors
can write checks.
2. Nontransaction Deposits - are savings accounts, money market
deposit accounts (MMDAs), and time deposits, or certificates of
deposit (CDs)
Borrowings - include short-term loans in the federal funds market,
loans from a bank’s foreign branches or other subsidiaries or
affiliates, repurchase agreements, and discount loans from the
Federal Reserve System.
The federal funds market is the market in which banks make
short-term loans—often just overnight—to other banks.
 Bank assets

are acquired by banks with the funds they receive from

depositors, with funds they borrow, with funds they
acquired initially from their shareholders, and with
profits they retain from their operations.
 Reserves

A bank asset consisting of vault cash plus bank deposits

with the Federal Reserve.
 Vault cash

Cash on hand in a bank; includes currency in ATMs and

deposits with other banks.
 Required reserves

Reserves the Fed requires banks to hold against demand

deposit and NOW account balances.
 Excess reserves

Any reserves banks hold above those necessary to meet

reserve requirements.
 Marketable securities

are liquid assets that banks trade in financial markets.

Banks are allowed to hold securities issued by the
government.
 Loans

The largest category of bank assets

are illiquid relative to marketable securities and entail

greater default risk and higher information costs
 bank loans fall into three categories:

1. loans to businesses—called commercial and

industrial, or C&I, loans

2. consumer loans, made to households primarily to

buy automobiles, furniture, and other goods; and

3. real estate loans, which include mortgage loans and

any other loans backed with real estate as collateral.