Banking and management of financial institutions

6 important questions on Banking and management of financial institutions

What is capital or net worth?

claims of the owners of the bank (e.g. shareholders)

How can the liabilities be subdivided on the balance sheet?

  • checkable deposits
  • non-transaction deposits
  • borrowings
  • bank capital

What is a checkable deposit?

our money. Savings on our current account.
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What is a loan?

a loan is a liability of an individual but an asset for a bank because it provides income and cannot be turned into liquid until the loan matures.

What are the four basic option a bank has when there is a reserve shortage?

1.Borrowing from other banks (overnight loans)
2.Sale of securities (bonds)
3.Borrowing from the FED (central bank)
4.Reducing loans (not renewing loans; selling loans to other banks)

How can a bank maximize its profits? (ways)

Tool 1:find borrowers who will pay high interest rates and have low possibility of nonpayment on loans.
Tool 2:banks try to purchase securities with high returns and low risk.
Tool 3:lower risk by diversifying. (àpurchasing different types of assets)
Tool 4:bank must manage the liquidity of its asset so that it can meet deposit outflows and reserve requirements. 

The question on the page originate from the summary of the following study material:

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