The structure of a commercial bank’s balance sheet

• Balance sheet

  A financial record of all the assets, liabilities and capital of a Commercial Bank at any given point in time
• Assets

  Anything of value that the Commercial Bank owns and can be converted into cash
• Liabilities

  Anything that the Commercial Bank owes to somebody else, such as deposits and borrowings
• Capital

  Comprises of shareholders' equity, including shareholders' funds and retained profit (reserves)
• The balance sheet must balance, with assets equal to liabilities plus capital
• Major assets of a Commercial Bank in order of liquidity

  • Cash
  • Reserves at the Bank of England
  • Short-notice money (interbank lending)
  • Short-term investments
  • Long-term investments
  • Advances (loans)
  • Fixed assets
• Major liabilities of a Commercial Bank

  • Deposits
  • Short-term borrowing
  • Long-term borrowing
  • Shareholders' funds
  • Retained profit (reserves)
• New Loan Creation

  Process where a bank creates a loan, increasing both assets and liabilities.
• When a bank creates a loan what part of a banks balance sheet increases?

  assets and liabilities
• Capital Ratio

  The ratio of a bank's capital to its total assets, indicating financial stability.
• Liquidity Ratio

  A measure of a bank's ability to meet short-term obligations.
• Capital Ratio

  A measure of a bank's long-term solvency and ability to absorb losses.
• Increase in Liquidity Ratio

  Indicates improved short-term financial position.
• Decrease in Capital Ratio

  Indicates increased vulnerability to financial shocks.