This lesson examines the major components of a bank’s balance sheet, explaining how the bank’s business model is reflected in its asset and liability structure .

2.1 The Asset Side of the Bank Balance Sheet
A bank’s assets represent how it uses its funds. The major categories include:

  • Cash and Due from Banks: Reserves held at the central bank and balances with other banks. These are the most liquid assets and include cash and cash equivalents, as well as balances held in other banks .

  • Investment Securities: Government bonds, corporate bonds, and other securities held for liquidity and income purposes .

  • Loans and Advances: The largest asset category, including mortgages, commercial loans, consumer credit, and other lending activities . The quality of this portfolio is a primary focus for analysts .

  • Trading and Derivatives Assets: Assets held for trading purposes, including derivatives positions .

  • Tangible and Intangible Assets: Property, equipment, and goodwill .

2.2 The Liability Side of the Bank Balance Sheet
A bank’s liabilities represent how it funds its assets. Major categories include:

  • Deposits: The primary funding source for most banks. These can be demand deposits (checking accounts), savings deposits, and time deposits (certificates of deposit) .

  • Borrowings: Funds borrowed from other banks (interbank borrowing) or through issuing debt securities (commercial paper, bonds) .

  • Other Liabilities: Accrued expenses, provisions, and other obligations.

2.3 Equity: The Buffer Against Losses
Shareholders’ equity is the residual interest in the bank’s assets after deducting liabilities. It is comprised of:

  • Share Capital: The par value of issued shares.

  • Retained Earnings: Accumulated profits.

  • Reserves: Other reserves including share premium and revaluation reserves.

  • Regulatory Capital: Capital that meets the regulatory requirements for solvency .

2.4 Off-Balance Sheet Items
Banks have significant off-balance sheet exposures that must be understood . These include:

  • Lending Commitments: Undrawn portions of loan facilities.

  • Guarantees and Letters of Credit: Contingent liabilities.

  • Derivatives: Notional amounts of derivative contracts .

  • Securitization Vehicles: Special purpose entities used to securitize assets .

 

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