11- Commerical Banks

1. saving associations
2. saving banks
3. credit unions

the largest FI group by asset size
- depository institution because significant part of funds come from customers deposits
- accept deposits (liabilities) and make loans (assets)

commercial banks provide loans to and accept deposits from non financial firms so,
- assets = loans, liabilities = deposits
non financial firms provide deposits to and obtain loans from commercial banks
- assets = deposits, liabilities = loans

1. key role in monetary policy for the central bank to rest of economy
2. efficienty provide payment solutions
3. offer maturity intermediation services

given for business purposes, safe investments because they are given for a specific project and are based on a real asset

based on real estate, more risky due to size and long maturity

credit risk (loan can't be repaid), interest rate risk (risk of negative spread between interest on loans and interest on borrowing), liquidity risk (bank run), insolvency risk (little equity compared to total assets)

they exploit the maturity mismatch of borrowing short and lending long

total cash assets + investment securities + net of reserves for loan losses

deposits + borrowings
- tend to have shorter maturity and greater maturity that assets

- loans are main revenue generating asset for banks and represemnt more than 50% of total assets of all US commercial banks
- commercial loans more important in large banks, consumer loans more important in small ones
- investment securities generate interest income for the bank and are used for trading and liquidity management

- have high debt to asset ratio
- transaction accounts include deposits that are either demand deposits or NOW accounts (sum of non interest bearing demand deposits + interest bearing checking accounts)
- CDs are fixed maturity interest bearing deposits with a face value greater than 100k that can be resold on secondary market
- Deposit funds are composed by transaction accounts, household savings and negotiable certificates of deposits

consists mainly of common and preffered stock, additional paid in capital and retained earnings

impacts their exposure to risk and ability to grow (both on and off balance sheet)
- regulations require bansk to hold minimum level of equity capital to act as buffer against losses
- relative low cost of deposit funding, so banks hold equity close to the minimum set

issuing financial instruments like guarantees and engaging in derivative trading to generate additional revenue
- important in terms of income they generate for banks as attracting high quality loan applicants and deposits is becoming more difficult
- guarantees (letters of credit) and making future commitments to lend

when an event occurs, this item moves onto the asset side of the balance sheet or income is realized on the income statement

when an event occurs, this item moves onto the liabilities side of balance sheet or an expense is realized on the income statement

holds and manages assets for individuals corporations
- requires lots of staff so only large banks offer it

provision of banking services to other banks that do not have enought staff resources to perform it themselves

activities on non financial services firms that perform banking services

savers put funds into money market mutual funds which invest in liabilities of shadow banks
borrowers get loans or leases from shadow banks
- itermediates the flow of funds between savers and borrows

interbank market for short term borrowing and lending of bank reserves

lending (asset) rates - deposit (liabilities) rate

(interest income - interest expenses)/ earning assets

interest rate spread x earning assets