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Enterprise/Systemic Risk

Another of your clients is the son of the CEO of a local bank. He just took over for his dad who recently had a heart attack. He came from role as CEO of a large manufacturing company and is new to the banking industry. He has received instructions from his Board of Directors, to make sure he has established adequate reserves against potential losses.

He came to you and asked that you describe the banks liabilities and equity accounts a commercial bank typically has, and has asked for a written report on the following topics:

- What are the typical major asset and liability categories on a bank's balance sheet; comment on the debt to equity level as compared to other corporate balance sheets you may have viewed?

- How exactly does a bank establish its reserve levels why does a bank care about these required reserve levels?

- Do most banks keep only the required reserves? Why?

- Knowing that changing reserve requirements can impact the bank's profitability, describe what could happen to potential profitability if $10,000 is deposited in a banks savings account.◦The reserve requirement was 5% yesterday but the Fed changes it to 10% today, when the deposit happens to be made.◦The bank regularly pays 3% on savings account deposits and charges 12% on loans.

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Banks Liabilities and Equity Accounts

I. Typical major asset and liability categories on a bank's balance sheet; debt to equity level as compared to other corporate balance sheets

According to Mishkin (2007), a bank's balance sheet is composed of a list of its sources of bank funds (liabilities) and a list of uses of funds (assets). The liabilities part includes the bank's borrowings and deposits received from clients (depositors). The assets part includes securities acquired from other companies (e.g. stocks and bonds) and loans granted or issued to borrowers. Loans granted to borrowers are liabilities to the borrowers but are considered as assets to the bank because basically they provide income to the bank.

Among the liabilities of the banks are checkable deposits (this allows the owner of the account to write checks to third parties), money market deposit accounts (these are payable on demand), non transactions deposits (said to be a primary source of bank funds that include savings deposits and time deposits), and borrowings from various sources.

The remaining component of the balance sheet is bank capital or net worth which is equal to the difference between the bank's assets and liabilities. According to Mishkin, bank capital is raised by selling ...

Solution Summary

Enterprise and systemic risks for a CEO are examined. The bank liabilities and equity accounts a commercial bank typically is determined.

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