True or False

1. Absolute PPP is different from Relative PPP

because the latter takes inflation into
consideration.
2. In a commercial bank’s balance sheet, deposits
are the assets, and loans are liabilities.
3. Deposits are a significant component of the
money supply, commercial banks play a key role
in the transmission of monetary policy for the
central bank to the rest of the economy.
©2007, The McGraw-Hill Companies, All Rights Reserved
 True or False
4. Many investment securities held by banks are
highly liquid, have low default risk, and can
usually be traded in secondary markets
5. Transaction accounts are checkable deposits
that either bear no interest (demand deposits) or
are interest bearing (most commonly called
accounts or NOW accounts.

©2007, The McGraw-Hill Companies, All Rights Reserved

 TRUE OR FALSE

6. Liquidity risk is the risk that arises when a

financial institution’s liability holders such as
depositors demand cash for the financial claims
they hold with the financial institution.
7. Noncurrent loans are loans past due 90 days or
less and loans that are not accruing interest
because of problems of the borrower.
noncurrent loans
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 IDENTIFICATION

8. Consumer-oriented banking, such as providing

residential and consumer loans and accepting
smaller deposits
9. Consumer-oriented banking, such as providing
residential and consumer loans and accepting
smaller deposits

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Chapter Eleven
Commercial Banks:
Industry Overview

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 Definition of a Commercial Bank

• Represent the largest group of depository

institutions
• Function similar savings institutions and
credit unions
• Liabilities include non-deposit sources of
funds
• Loans are broader in range
• Regulated separately from savings
institutions and credit unions
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 Differences in Balance Sheets

Commercial Banks Nonfinancial Firms

Assets Liabilities Assets Liabilities
Loans Deposits Deposits Loans

Other Other
financial financial
assets assets

Other Other Other Other

non- liabilities non- liabilities
financial and financial and
assets equity assets equity

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 Commercial Bank Balance Sheet
Assets
Total cash assets………………. P 416.9
PH gov securities…………… P 1047.4
Fed Funds/Repurchase………. 384.6
Other…………………………. 447.3
Investment securities………….. 1,879.3
Interbank loans………………. 193.6
Loans exc. Interbank………… 4,624.3
Comm. and Indust…………..P 890.1
Real estate…………………… 2,544.9
Individual……………………. 806.3
All other……………………… 383.0
Less: Reserve for losses……… 78.1
Total loans……………………… P 4,739.8
Other assets…………………….. 1,208.4
Total assets…………………….. P8,244.4

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 Commercial Bank Balance Sheet

Liabilities and Equity

Transaction accounts…………… P 712.9
Nontransaction accounts………... 4,689.1
Total deposits…………………… P5,406.0
Borrowings……………………… 1,769.6
Other liabilities………………….. 247.4
Total liabilities………………….. P7,423.4
Equity…………………………… 821.4

©2007, The McGraw-Hill Companies, All Rights Reserved

 Balance Sheet Items

• Assets
• Liabilities
• Equity
• Off-Balance-Sheet activities
• Trust services
• Correspondent banking

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 ASSETS

• There are four broad classes of loans

– Through loans, there are interest income and
income from transaction fees
• Investment securities generate interest
income
• Loan sales and securitization

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 LIABILITIES
• Two major sources of funds
– Deposits:
• Transaction accounts
• Household savings
• Negotiable certificates of deposit
– Borrowed funds
• Liabilities reflect shorter maturity structure than
a bank’s assets
• Bank managers concerns are maturity mismatch
and liquidity risk ©2007, The McGraw-Hill Companies, All Rights Reserved
 OFF-BALANCE-SHEET ACTIVITITES

• Definition: fee-related activities off the

balance sheet that earn additional income
• Examples:
– Letter of Credit
– Derivative transactions
• Off-Balance Sheet Asset
• Off-Balance Sheet Liabilities
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 OTHER FEE-GENERATING
ACTIVITIES
• Trust Services
• Correspondent Banking

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 Economies of Scale and Scope

• Economies of scale
• Economies of scope
• Megamerger
• X efficiencies

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 Bank Size and Concentration

• Retail Banking
–Community bank
• Wholesale Banking
–Regional or superregional
bank
• Federal funds market
• Money center bank
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 Bank Size and Concentration

• Retail banking
– provide residential and consumer loans
and accepting small deposits
• Wholesale banking
– provide commercial and industrial loans
funded with purchased funds

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 True of False

• Asset or lending size of a bank is the first

qualification to make a bank a money center
bank.
• Classification as a money center bank is
based in part on location of the bank and in
part on the bank’s heavy reliance on
nondeposit or borrowed sources of funds.

©2007, The McGraw-Hill Companies, All Rights Reserved

 Bank Size and Activities

• Large banks have easier access to capital

• Large banks tend to use more purchased
funds and have fewer core deposits
• Large banks lend to larger corporations
which means that their interest rate spread
is narrower
– the difference between lending and deposit rates
• Large banks are more diversified and
generate more noninterest income
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 Bank Size and Activities

• Net interest margins - interest income

minus interest expense divided by earning
assets

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 Industry Performance

• Net charge-offs - actual losses on loans

and leases.
• Net operating income - Income before
taxes and extraordinary items
• Noncurrent loans - Loans past due 90
days or more and loans that are not
accruing interest because of problems of
the borrower
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 Regulators

• SEC
• BSP
• PDIC
• DOF
• BOT

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