Bank Balance Sheets
Chris Blake
Director
This video aims to provide a simple overview of a bank balance sheet, enabling the viewer to identify the principal items on it and what they mean.
This video aims to provide a simple overview of a bank balance sheet, enabling the viewer to identify the principal items on it and what they mean.
Bank Balance Sheets
12 mins 45 secs
Key learning objectives:
Analyse the principal asset items (footings) that typically feature on a bank’s balance sheet
Analyse the principal liability items (footings) that typically feature on a bank’s balance sheet
Analyse the makeup of Equity, sometimes called shareholders’ funds, on a bank’s balance sheet
Understand why these items exist on the balance sheet and what this tells you about the bank’s business model and hence risks
Overview:
This video aims to provide a simple overview of a bank balance sheet, enabling the viewer to identify the principal items on it and what they mean. This video looks to demystify bank balance sheets by trying to decompose even the HSBC balance sheet -into consumable and understandable chunks which just happen to have a lot of zeros that come with it- which is arguably one of the largest and most complicated banks in the world.
What is a balance sheet?
A balance sheet is a statement that keeps track of what a bank owns, what a bank owes, and the net worth of a bank’s operation. It helps us determine:
- Types of business the bank is undertaking
- Indication of the health of the business
- Riskiness as a whole
What is an asset?
An asset may be defined as either something the firm physically possesses, such as a property or a piece of equipment, or an amount owing to it.
What are the characteristics of an asset?
- They have economic value to the bank
- They can be converted into more money
What are the principal asset items that typically feature on a bank’s balance sheet??
- Customer loans - These are loans to retail, commercial, and institutional clients. It is worth noting that the percentage of the balance sheet that these loans make will depend on the nature of the business model.
- Financial Investments - These will mainly be government and other fixed income securities (supranational and development bank bonds alongside other corporate and institutional bonds, generally named "credit").
- HQLA - This is the regulatory terminology for assets that are the easiest to turn into cash either by outright sale, by repurchase agreements in private markets, or by going to a central bank as lender of last resort.
- Cash - This is the prime source of liquidity. Most of these balances will be freely withdrawable by the bank, and this forms the basis of liquidity which the bank can use.
- Reverse Repo - Reverse repo is a form of collateralised lending where you lend money in return for collateral in the form of securities.
- Loans
While these form the majority of the funded balance sheet, there will always be other assets.
- Derivatives - this is the market value of all derivative positions with a positive value to the bank.
- Goodwill - It arises if the bank has bought and absorbed another bank (or another business such as an insurance company) and paid more for it than its current net asset value.
- Other assets
What is liability?
A liability is an amount or debt owed by the firm to another party, a planned future monetary loss based on past deals and transactions.
Just as customer loans are the biggest asset on a bank’s balance sheet, customer deposits, known as customer accounts, are generally the biggest liability on the bank balance sheet for retail and commercial banks.
What is issued debt and why is this issued?
This is senior preferred debt and will be issued for four reasons:
- To manage regulatory ratios like the liquidity coverage ratio or the net stable funding ratio
- Some entities cannot pass excess deposits to others and therefore are forced to issue debt
- To manage currency mismatch, the lending and borrowing in different currencies
- Give assurance around the stability of the term of a liability removing the possibility of unexpected withdrawal risk of a deposit
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