Bank Management

Dr. Mohammad Samir Mahmoud

:Learning Outcomes

By the end of this lecture, students will be able to:

• Understand and analyze the financial statements published by modern commercial banks.

• Analyze financial information for depository financial institutions.

• Practice the empirical foundations upon which practices in depository financial institutions are based and the factors that influence

decision making within these contexts.

Lecture 6
Liabilities
(6/1) The Balance Sheet (Liabilities):

DEPOSITS
• Demand Deposits.

01
• Saving Deposits.
• NOW Deposits.
• Money Market Deposits.
• Time Deposits (CDs).

BORROWINGS

02 Borrowings from Nondeposit Sources

FED FUNDS

03 Federal Funds Purchased & Repurchase

Agreements
(6/1) The Balance Sheet (Liabilities):

DEPOSITS
• Demand Deposits.

01
• Saving Deposits.
• NOW Deposits.
• Money Market Deposits.
• Time Deposits (CDs).

BORROWINGS

02 Borrowings from Nondeposit Sources

FED FUNDS

03 Federal Funds Purchased & Repurchase

Agreements
(6/2) The Balance Sheet (Cont.):
(B) Liabilities:

• Bank liabilities are composed of deposits, Borrowings from Nondeposit Sources, and Federal Funds Purchased and

Repurchases Agreements.

(1) Deposits:

• Deposits representing financial claims held by businesses, households, and governments against the banking firm.

• In the case of bank is liquidated, the proceeds from the sale of its assets must first be used to pay off the claims of

its depositors. Other creditors and stakeholders receive whatever funds remain.
(6/2) The Balance Sheet (Cont.):

(1/1) Demand Deposits: Pay no interest, and allow checks writing (Checking Accounts).

(1/2) Saving Deposits: Pay interest and have no set maturity and no check-writing capabilities.

(1/3) Negotiable Orders of Withdrawal (NOW): Pay interest, and allow checks writing, but banks require minimum balance

before a depositor earns interest and may impose service charges if balance fall below a minimum.
(6/2) The Balance Sheet (Cont.):

(1/4) Money Market Deposit Accounts (MMDAs): Pay market rates, but a customer is limited to no more than six checks and

automatic transfers each month, and bank must receive seven days’ notice before any withdrawals.

(1/5) Time Deposits (Certificates of Deposits CDs): A certificate of deposit (CD) is a product offered by banks that offers an

 
interest rate premium in exchange for the customer agreeing to leave a lump-sum deposit untouched for a predetermined period

of time, with applying penalties for early withdrawal.

(6/1) The Balance Sheet (Liabilities):

DEPOSITS
• Demand Deposits.

01
• Saving Deposits.
• NOW Deposits.
• Money Market Deposits.
• Time Deposits (CDs).

BORROWINGS

02 Borrowings from Nondeposit Sources

FED FUNDS

03 Federal Funds Purchased & Repurchase

Agreements
(6/2) The Balance Sheet (Cont.):
(2) Borrowings from Nondeposit Sources:

• Borrowing from non-deposits sources have grown rapidly in recent years as there are no reserve

requirements or insurance fees on most of these funds, which lowers the cost of Nondeposit funding.

• Borrowing in the money market usually can be arranged in a few minutes and the fund wired immediately to

the depository institution that needs them.

• However, the interest rate on Nondeposit funds are highly volatile, and therefore borrowing cost can raise

rapidly.
(6/1) The Balance Sheet (Liabilities):

DEPOSITS
• Demand Deposits.

01
• Saving Deposits.
• NOW Deposits.
• Money Market Deposits.
• Time Deposits (CDs).

BORROWINGS

02 Borrowings from Nondeposit Sources

FED FUNDS

03 Federal Funds Purchased & Repurchase

Agreements
(6/2) The Balance Sheet (Cont.):
(3) Federal Funds Purchased and Reserve Repurchase Agreements:

• Federal funds are temporary loans (usually extended overnight) borrowed from other depository

institutions. They called federal as these temporary loans often come from the reserves kept by the lending

depository institutions with the Federal Reserve Bank.

• Repurchase Agreements are temporary credits in the form of repurchase agreements in which the banking

firm gives up temporary title to securities owned by it to the borrower who holds those securities as

collateral until the loan is paid off. ‫أوراقما لية ي رهنها ا لبنكل دىا لمقرضل حينس داد ا لقرض‬
Equity
 (6/2) The Balance Sheet (Equity):

STOCKS RETAINED EARNINGS

• Preferred Stocks. Accumulated Net income

01 • Common Stocks.
03 Less Cash Dividends.

SURPLUS OTHER EQUITY

• Amount Excess Par Values.
Federal Funds Sold & Reserve Repurchase

02 04 Agreements
(6/2) The Balance Sheet (Cont.):
(C) Equity:

• Capital represents owners’ (stockholders) share in the firm.

• Every new financial firm begins with a minimum amount of owners’ capital and then borrows funds from the public to “lever up” its

operations. Financial institutions are among the most heavily leveraged (debt-financed) of all businesses. Their capital accounts

normally represent less than 10 percent of the value of their total assets.

• Common and Preferred Stocks are listed at their par values while the surplus account represents the amount of proceeds

received by the firm in excess of par when the stock was issued.

• Retained Earnings represent the firm’s cumulative net income since the firm started operation, minus all cash dividends paid to

stockholders.

• Other Equity is small and usually reflects capital reserves.

(6/2) The Balance Sheet (Cont.):
• Because their function is primarily financial, most depository institutions own few fixed assets and thus exhibit low

Operating Leverage.

• Banks operate with Less Equity Capital than nonfinancial companies, which increases Financial Leverage and the

volatility of earnings.

• Many commercial bank deposits are insured by the FDIC. Thus, if the bank fails, the deposit holder is guaranteed payment

for the insured amount.

Financial Assets
Debt

High Low
Fixed Assets
Equity

Financial Lev Operating L

erage everage
:The Balance Sheet (Representation) )6/4(
Bank Balance Sheet
As on XX December 20XX
Assets
Cash and Due from Depository Institutions xxx
Securities xxx
Trading Account Securities xxx
Gross Loans and Leases xxx
(Less) Allowance for Loans & Leases Loss )xx(
(Less) Unearned Income )xx(
Net Loans and Leases xxx
Federal Funds Sold & Reserves Rep. Agrees. xxx
Bank Premises and Fixed Assets xxx
Other Real Estate Owned xxx
Goodwill and Other Intangibles xxx
All Other Assets xxx
Total Assets xxxx
:The Balance Sheet (Representation) )6/4(
Bank Balance Sheet
As on XX December 20XX
Liabilities & Equity Capital:
Liabilities:
Deposits xxx
Other Borrowed Funds xxx
Federal Funds Purchased & Repurchased Agrees. xxx
All Other Liabilities xxx
Total Liabilities xxxx
Equity Capital:
Preferred Stock xxx
Common Stock xxx
Surplus xxx
Retained Earnings xxx
Other Equity xxx
Total Equity Capital xxxx
Total Liabilities & Equity Capital xxxx
:The Balance Sheet (Representation) )6/4(
Alpha Bank Balance Sheet
Assets Dec. 202X 31
Cash and Due from Depository Institutions 1623978
Securities 33252255
Trading Account Securities 1098289
Gross Loans and Leases 100207386
Allowance for Loans & Leases Loss )Less( 2600670
Unearned Income )Less( 0
Net Loans and Leases 97606716
Federal Funds Sold & Reserves Repurchase Agreements 397592
Bank Premises and Fixed Assets 1582808
Other Real Estate Owned 1623417
Goodwill and Other Intangibles 21681734
All Other Assets 0
Total Assets 158866789
:Liabilities & Equity Capital  
:Liabilities  
Deposits 116112841
Other Borrowed Funds 17310621
Federal Funds Purchased & Repurchased Agreements 2767917
All Other Liabilities 6484531
Total Liabilities 142675910
:Equity Capital  
Preferred Stock 0
Common Stock 3448749
Surplus 5620340
Retained Earnings 7539696
Other Equity 417906-
Total Equity Capital 16190879
Total Liabilities & Equity Capital 158866789
Comman Equity Shares Outstanding 6897498
Questions
 Thank You

Ibn.khaldun.1976@gmail.com + (2)
Dr. Mohammad Samir