Learning Objectives:

  • Identify and explain the major asset categories on a bank balance sheet.

  • Identify and explain the major liability and equity categories.

  • Understand how the balance sheet reflects a bank’s business model.

2.1 The Bank Balance Sheet Structure

The balance sheet presents a bank’s financial position at a specific point in time. As the HKU Business School course requires, students must learn to “Analyze and assess the balance sheet and income statement composition to understand the bank’s business model” . The GICP course covers “relating the business to the balance sheet and income statement” as a core topic .

2.2 Assets: Uses of Funds

Cash and Due from Banks: The most liquid assets, including reserves held at the central bank and balances with other banks.

Investment Securities: Government bonds, corporate bonds, and other securities held for liquidity and income purposes. The University of Malta course covers “accounting for fixed income securities and equities” as a core component .

Loans and Advances: The largest asset category for most banks, including mortgages, commercial loans, and consumer credit. The HKU Business School course examines “how banks manage credit risk and report provision for loan losses” .

Derivatives and Trading Assets: Financial instruments held for trading or hedging purposes. The University of Malta course includes “an overview of hedging instruments such as forwards, futures, swaps and options” .

2.3 Liabilities: Sources of Funds

Deposits: The primary funding source, including demand deposits, savings deposits, and time deposits.

Borrowings: Funds borrowed from other banks or through issuing debt securities. The GICP course covers “funding sources and stability” .

Provisions: Funds set aside for expected losses and liabilities, including loan loss provisions.

2.4 Equity: The Buffer Against Losses

Equity represents the owners’ stake and serves as a buffer against losses. The HKU Business School course examines “how banks manage regulatory capital and its reporting” . Components include share capital, reserves, and retained earnings.

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