Learning Objectives:

• Explain the structure of a commercial bank’s balance sheet.

• Understand how banks manage assets, liabilities, and liquidity.

• Describe the key risks faced by commercial banks.

7.1 The Bank Balance Sheet

The University of Edinburgh course covers “a bank’s balance sheet and income structure: a retail bank’s balance sheet, an investment bank’s financial statements. Bank performance” .

Assets: A bank’s uses of funds, primarily consisting of loans and advances, investment securities, and cash and due from banks. In both Wells Fargo and U.S. Bank, loans make up about half to two-thirds of the bank’s assets, while most of the rest is securities .

Liabilities: A bank’s sources of funds, primarily consisting of customer deposits. In both Wells Fargo and U.S. Bank, deposits exceed loans, and most of the bank’s assets are covered by deposits .

Equity: The residual interest of shareholders, serving as a buffer against losses.

7.2 Asset, Liability, and Liquidity Management

The University of Edinburgh course covers “asset and liability management, liquidity management, capital adequacy, off-balance sheet business, loan sales and securitization” . Asset-liability management (ALM) ensures that the bank’s assets and liabilities are managed in a coordinated manner to optimise profitability while maintaining safety.

7.3 Key Performance Metrics

Students are expected to “analyse a bank’s balance sheet” and “evaluate the financial performance of a bank” . This includes understanding:

• Return on Equity (ROE)

• Return on Assets (ROA)

• Net Interest Margin (NIM)

• Efficiency Ratio

• Capital Adequacy Ratio.