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Bank Balance Sheets Essay

567 words - 3 pages

Bank Balance Sheets
Alissa Leith
ECO316: Financial Institutions and Markets
Instructor: Shane Thompson
October 20, 2014

Bank Balance Sheets
While many individuals look at a bank as a place to store or borrow money, they are a business that needs to keep their financial records in check. A bank uses a balance sheet like any other business, and must comply with the regulations set by the Federal Reserve System (Fed). When an individual has an account with the bank, such as a checking account, where they deposit funds, the account is a liability for the bank and an asset for the depositor (Hubbard & O’Brien, 2013). The reason behind the account being a liability for the bank is that at any time the depositor can withdraw their deposited funds to be used elsewhere. The intent of this paper is to describe/demonstrate the impact of deposits and loans on a bank balance sheet.
As a customer of ABC Bank, I ...view middle of the document...

1 (reserve ratio). Now the T-account will be changed to reflect the addition of the reserve amount and the excess reserve per the required ratio:
Assets | Liabilities |
Reserve $10 | Checking Deposits $100 |
Excess Reserve $90 | |

After completing the required reserve and the excess reserve, the bank now has an additional $90 that it can loan out in order to acquire more capital. When the bank loans out their excess reserves the T-account will change once again and will reflect the reserve and loans made as assets. The loans made are assets as they are expected to be repaid (Hubbard & O’Brien, 2013). The T-account to represent the loan would be as follows:
Assets | Liabilities |
Reserve $10 | Checking Deposits $100 |
Loan $90 | |

Banks loan out their excess reserve in order to gain more capital by way of interest on loans. In addition, once a loan is deposited into another financial institution say DEF Bank, DEF is now able to keep their portion of required reserves and loan out the remaining excess reserves. This is a never-ending cycle as long as depositors keep depositing and banks keep lending. The loan remains an asset on ABC's balance sheet and is countered by bank capital. The T-account would look like this:
Assets | Liabilities |
Reserve $10 | Checking Deposits $10 |
Loan $90 | Bank Capital $90 |

As I have displayed above transactions within the bank affect the balance sheet as with any organization. As the bank’s assets increase with a loan, their liabilities decrease therefor increasing their bank capital. It was my intention to explain the impacts of everyday transactions on the bank balance sheet utilizing T-accounts.

Reference
Hubbard, R. G., & O'Brien, A. P. (2013). Money, Banking, and the Financial System (2nd ed.). Saddle River, NJ: Pearson Education, INC.

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