This lesson examines the unique structure of a bank’s balance sheet, focusing on the key asset, liability, and equity categories.

2.1 The Balance Sheet Equation
The balance sheet presents the financial position of a bank at a specific point in time. The accounting equation, Assets = Liabilities + Equity, holds true for banks. The balance sheet provides a snapshot of how the bank uses its funds (assets) and how it sources them (liabilities and equity) .

2.2 Assets: Uses of Funds
A bank’s assets represent its uses of funds. Major categories include:

• Cash and Due from Banks: Reserves held at the central bank and balances with other banks. This is the most liquid asset category.

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

• Loans and Advances: The largest asset category for most banks, including mortgages, commercial loans, and consumer credit. Understanding loan quality is a key focus of analysis .

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

2.3 Liabilities: Sources of Funds
A bank’s liabilities represent how it funds its assets. Major categories include:

• Deposits: The primary funding source for most banks, including demand, savings, and time deposits. Funding stability is a key analytical focus .

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

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

2.4 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, retained earnings, and reserves. Equity serves as a buffer against losses and a key measure of capital adequacy .