Another of your clients is the son of the CEO of a local bank. He just took over for his dad who...

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Another of your clients is the son of the CEO of a local bank. He just took over for his dad who recently had a heart attack. He came from role as CEO of a large manufacturing company and is new to the banking industry. He has received instructions from his Board of Directors, to make sure he has established adequate reserves against potential losses.

He came to you and asked that you describe the banks liabilities and equity accounts a commercial bank typically has, and has asked for a written report on the following topics:

What are the typical major asset and liability categories on a bank's balance sheet; comment on the debt to equity level as compared to other corporate balance sheets you may have viewed?
How exactly does a bank establish its reserve levels why does a bank care about these required reserve levels?
- Do most banks keep only the required reserves? Why?
Knowing that changingreserve requirements can impact the bank’s profitability, describe what could happen to potential profitability if:
- $10,000 is deposited in a banks savings account.
- The reserve requirement was 5% yesterday but the Fed changes it to 10% today, when the deposit happens to be made.
- The bank regularly pays 3% on savings account deposits and charges 12% on loans.

David · Accepted Answer

A balance sheet consists of a variety of assets on one side and liabilities and owners' equity 
belong to the other side. Liabilities and owners' equity are the claim on the assets of an 
entity.  The balance sheet of commercial bank has loans and investments as major assets 
rather than inventory, accounts receivable and fixed assets that are found in a typical 
balance sheet of a corporation. Foremost claims of a commercial bank's balance sheet are 
not accounts payable found as a main current liability in non banking entities but are 
deposits and borrowings.
Way states that “Balance sheet of a commercial bank has two main sides that are the assets 
and the liabilities. Upon study of the balance sheet of a bank we understand the manner in 
which the bank raised funds and how these funds are allocated into different categories of 
assets”. Bank can keep other forms of money with them also such as shareholders share 
capital, or even depositor’s deposits. They form the part of bank's liabilities. Whereas on the 
other hand, generation of assets takes place by bank's own sources of income only.  
A typical commercial Bank’s balance sheet category heads can be categorized into: 
Assets 
Loan Assets 
 Loans comprise of a major category of assets on any typical commercial bank's 
balance sheet. Since by purpose of their incorporation the business of a bank is of 
lending money and the primary uses of that money is to issue and provide loans to 
consumer and businesses. Just as in any commercial corporation any accounts 
receivable can become uncollectible similarly a bank may hold bad loans at times. In 
order that the bank preserves it assets value it must be careful about the credibility 
of the borrower in order to ensure the quality of its loans as writing down any bad 
loans may results in losses and reduces owners' equity as in case of writing down of 
any uncollectible debt reduces equity. 
Investment Assets 
 Being a financial institution itself, a commercial bank also makes investment in 
various financial securities based on the maturity that suits its needs in order to 
balance its loan portfolios. A correct and right mix of investments helps the bank 
control and mitigates its total asset risks and can also help it manage its current 
obligation and match with the available investments.

Another of your clients is the son of the CEO of a local bank. He just took over for his dad who recently had a heart attack. He came from role as CEO of a large manufacturing company and is new to...

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