Money & Banking Part 1

2st Year Money and Banking Part (1) AMT
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AMT
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Page | 0 call or WhatsApp:01022124292 / 01060649083 Facebook group: Public Economics study group
The main points in this chapter:

1. Bank balance sheet.
2. Basic banking.
3. General principles of bank management.
4. Asset management.
5. Liability management.
6. Capital adequacy management.
The important rule of banking:

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1. Banking plays an important rule to make the economy run smooth and
efficiently because they channel funds to borrowers with productive
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investment opportunities.
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2. Banks supply credit to business and provide individuals with services such as
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checking and saving accounts.
Bank balance sheet
Assets liabilities
 Uses of funds  Sources of funds
 Lending to businesses,  Borrowing from household,
households, or other banks banks, corporations, and
central bank
reserves securities loans Deposits Borrowing
Other assets Bank capital
1.The bank balance sheet

(1) The balance sheet of a bank is a list two sides
(liabilities ) sources of funds , (assets) uses of funds.
(2) The characteristics of balance sheet:
Total assets = total liabilities + bank capital

(3) A bank's balance sheet is a list of:
a) its sources of funds (liabilities).
b) its uses of funds (assets).
(4) Banks obtain funds by borrowing or issuing liabilities such as deposits and uses
these funds to acquire assets such as securities and loans.
(5) Banking makes profits because the interest they charge on their assets is higher than
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the interest they pay on their liabilities.
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❖ A summary of a commercial bank’s balance sheet

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❖ Liabilities:
Liabilities: are the source of funds where the bank acquires funds by issuing
liabilities such as deposits which may be:
(a) Transactions deposits: Checkable deposits
(b) Non-transaction deposits: saving deposits and time deposits.
1. Checkable deposits: Transaction deposits. They are called demand deposits

and current deposits (account).
• allow the owner to write checks to third party.
• include all deposits on which a check can be drawn.
• Which are non-interest checking account, ‫ودائع ال يدفع عليها فائدة‬
• so they are the lowest –cost source of bank funds because the bank doesn't
pay interest on it
• they are subject to reserve requirement. ‫خاضعة لمتطلبات االحتياطي‬
• are considered as a medium of exchange so they are considered as a part of
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narrow definition of money M1 ‫عشان بنسحب منها عند الطلب وبالتالي هي فلوس في السوق‬
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‫وبالتالي هي جزء من العرض النقدي بمفهوم السيولة‬

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• liquid asset for depositor and considered as a medium of exchange.

• their cost includes: interest payments (if there is) and cost of servicing and
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processing the account.
2. Non-transaction Deposits: ‫الودائع‬

• these deposits include: saving deposits and time deposits (called certificate of
deposits). They considered as a store of value and cannot function as a
medium of exchange
• they are the primary source of funds for banks (53%).
• Owners can't write checks on them
• Banks pay interest on these deposits.
A. Saving deposits:
▪ They are the most common type non-transaction of deposits.
▪ The funds in these deposits can be drawn or the owner can add to it at any
time where the transaction and interest are recorded in a passbook held by
the owner. ‫الودائع االدخارية يمكن السحب و اإلضافة منها ويسجل في دفتر توفير‬
▪ Banks pay interest on saving deposits.( they are costly source of funds)
B. time deposits: (called certificate of deposits) OR
( negotiable certificate of deposits) if they can be sold in secondary market
▪ These deposits have a fixed maturity length range from several months to
more than 5 years.
▪ Early drawn (before maturity) from time deposits are subject to substantial
penalties.
▪ Banks pay interest on saving deposits.( they are costly source of funds)
3. Borrowings:
▪ Represent 30% of bank liabilities.
▪ Bank borrows from:
(a) central bank (Discounted loans).
(b) other banks. ( Federal funds loans)
(c) corporations: this loan is called Repurchase Agreement.
▪ Banks borrow overnight loans in the federal funds market to satisfy the reserve
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requirements at the central bank.
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4. Bank capital:
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▪ It is the bank net worth which = Total assets – liabilities.

▪ Capital can be raised by two methods:
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selling new equity (stocks) OR from retained earnings.

▪ Bank capital is a cushion ‫ مصدة‬against a drop in the value of its assets which could
force the bank into insolvency ‫ العسر او اإلفالس‬: a case where liabilities in excess of
assets.
❖ Assets:
1. Assets are the uses of funds: because the bank uses funds to purchase income-
earning assets such as loans and securities.
2. The interest earned on these assets enable the bank to make profits.
3. These assets are:
a) Reserves.
b) Cash items in process of collection.
c) Deposits at other banks.
d) Securities.
e) Loans.
f) Other assets.
A. Reserves:
• Reserves are funds that the bank keeps in its vault or at the central bank.
• Reserves +currency held by banks are called vault cash.
• Reserves are divided into:
✓ Required Reserves: which are held as reserve requirements because the
regulations require from each bank to keep a certain ratio (say 10%) of
each dollar deposit at the central bank.
✓ Excess Reserves: they are the most liquid of all bank 's assets, and are
used to meet its obligations when there is a deposit outflow (funds
drawn by the depositor).
B. Cash items in the process of collection:

• They are checks written on an account at another bank and not collected yet.
• It can be classified as an asset for the bank because it is acclaim on another
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bank.
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C. Deposits at other banks:

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• Small banks hold deposits in large banks for their services (check written,
foreign exchange transaction, securities purchases). This aspect of a system is
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called corresponding banks.

• Cash items = reserves +cash items in the process of collection + deposits at
other banks. These items represent about 8% of the total assets.
D. Securities:
• The bank hold only debt instrument but banks are not allowed to hold
stocks. Because stocks are very risky.
• Its importance: is due to they are income- earning assets.
• Their types: may be government securities or other securities.
• Government short term securities are called secondary reserves because of
their high liquidity.
• These securities may have default risk because the issuer may not be able
to pay interest payments or the face value of the securities.
• default risk: is the inability of the borrower to repay the interest or the
principle of the security.
E. Loans:
• Banks provide commercial and industrial loans to individuals or to
corporations and provide real estate loans.
• Loans produce more than 50% of banks revenues.
• Loans are assets for the bank but a liability for the borrower.
• Loans are the less liquid than other assets because they cannot be turned
into cash until their maturity.
• Default risk: They have a high probability of default than other assets.
• Banks earns a highest return on loans because of:
1- its less liquidity.
2- its higher default risk.
- The major difference between various depository institutions is in on the type of
loans in the balance sheet. For example: Savings and Loan associations specialize in
residential mortgage. am
F. Other assets:
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- These include all the bank’s physical capital such as buildings, computers and other
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equipment.
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Questions
1) Which of the following are reported as liabilities on a bank’s balance sheet?
A) Reserves B) Checkable deposits
C) Loans D) Deposits with other banks
2) The share of checkable deposits in total bank liabilities has

A) expanded moderately over time.
B) expanded dramatically over time.
C) shrunk over time.
D) remained virtually unchanged since 1960.
3) Because checking accounts are ________ liquid for the depositor than passbook
savings, they earn ________ interest rates.
A) less; higher B) less; lower
C) more; higher D) more; lower am
4) Which of the following are transaction deposits?
A) Savings accounts
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B) Small-denomination time deposits

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C) Demand deposits
D) Certificates of deposit
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5) Large-denomination CDs are ________, so that like a bond they can be resold in a
________market before they mature.
A) nonnegotiable; secondary
B) nonnegotiable; primary
C) negotiable; secondary
D) negotiable; primary
6) Because ________ are less liquid for the depositor than ________, they earn higher
interest rates.
A) money market deposit accounts; time deposits
B) checkable deposits; passbook savings
C) passbook savings; checkable deposits
D) passbook savings; time deposits
7) Bank loans from the central bank are called ________ and represent a ________ of
funds.
A) discount loans; use
B) discount loans; source
C) fed funds; use
D) fed funds; source
ohsen “economics platform” Page 7
8) Which of the following is not a source of borrowings for a bank?
A) Federal funds loans
B) Eurodollars
C) Transaction deposits
D) Discount loans
9) Bank reserves include

A) deposits at the Fed and short-term treasury securities.
B) vault cash and short-term Treasury securities.
C) vault cash and deposits at the central bank.
D) deposits at other banks and deposits at the Fed.
10) Secondary reserves include

A) deposits at Federal Reserve Banks.
B) deposits at other large banks.
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C) short-term Treasury securities.
D) state and local government securities.
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11) Because of their ________ liquidity, ________ U.S. government securities are called
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secondary reserves.
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A) low; short-term
B) low; long-term
C) high; short-term
D) high; long-term
12) Bankʹs make their profits primarily by issuing ________.

A) equity B) negotiable CDs C) loans D) NOW accounts
13) The most important category of assets on a bank’s balance sheet is

A) discount loans. B) securities. C) loans. D) cash items in the process of collection.

Money & Banking Part 1

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2st Year Money and Banking Part (1) AMT

The main points in this chapter:

The important rule of banking:

checking and saving accounts.

Bank balance sheet

reserves securities loans Deposits Borrowing

Other assets Bank capital

1.The bank balance sheet

(2) The characteristics of balance sheet:

Total assets = total liabilities + bank capital

❖ A summary of a commercial bank’s balance sheet

1. Checkable deposits: Transaction deposits. They are called demand deposits

‫وبالتالي هي جزء من العرض النقدي بمفهوم السيولة‬

• liquid asset for depositor and considered as a medium of exchange.

processing the account.

2. Non-transaction Deposits: ‫الودائع‬

▪ It is the bank net worth which = Total assets – liabilities.

selling new equity (stocks) OR from retained earnings.

B. Cash items in the process of collection:

C. Deposits at other banks:

called corresponding banks.

2) The share of checkable deposits in total bank liabilities has

B) Small-denomination time deposits

9) Bank reserves include

10) Secondary reserves include

12) Bankʹs make their profits primarily by issuing ________.

13) The most important category of assets on a bank’s balance sheet is

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