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Chapter 2 Bank Fund

The document provides an overview of key concepts related to bank fund management including sources and uses of bank funds, the bank's balance sheet identity, off-balance sheet activities, income statement, and fund flow statement. It discusses topics such as the various sources of bank funds including deposits, capital, and borrowings. It also covers how bank funds are used for lending, investments, cash assets, and other functions.

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Niloy Ahmed
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49 views

Chapter 2 Bank Fund

The document provides an overview of key concepts related to bank fund management including sources and uses of bank funds, the bank's balance sheet identity, off-balance sheet activities, income statement, and fund flow statement. It discusses topics such as the various sources of bank funds including deposits, capital, and borrowings. It also covers how bank funds are used for lending, investments, cash assets, and other functions.

Uploaded by

Niloy Ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Discussion Topic (Lecture-2)

Chapter Name: Introduction to Bank Fund

• An Overview of Bank-Fund Management


• Sources and Uses of Bank Fund
• Bank’s Balance Sheet Identity
• Off-Balance Sheet Activities
• Income Statement and Fund Flow Statement
• Comparison of Different Sources of Bank Fund
Bank and Banking
An Overview of Bank Fund Management
Bank funds management includes
all policies and approaches
designed to obtain funds from
deposits and borrowings and to
allocate them to loans and
investments. More specifically,
the emphasis in funds
management is on the funds over
which management has
discretionary control -- these are
primely assets and liabilities
bought and sold in impersonal
financial markets.
In recent years, several terms have been used to describe approaches to
funds management. Often, these terms have (e.g., "balance sheet
management" and "asset/liability management") are used interchangeably
with funds management.
An Overview of Bank Fund Management
Objectives:
Bank "funds management" is the key to short-to-
intermediate decision making in the dynamic and
volatile banking environment.

Therefore, we think about risk management in a


nutshell.

Can you identify the bank risks? ??


Sources of Bank Fund
1. Capital [stock and Debenture]
2. Deposit [85%-95% of total bank fund]
Current/Savings/Fixed deposit
3. Borrowed Fund [Short-term and Long-term]

Total Assets = Total Liabilities + Equity Capital


Uses of the Bank Fund
1. Lending function [50%-65% of total Fund]
 Business Purpose (working capital, trade loan etc.)

 Non-business Purpose (Car loan, house loan etc.)

2. Investment Function
 Treasury bonds/notes/bills

 Blue-chip and first-class bonds, debenture.

3. Cash Asset (Liquidity) Function


 Cash in vault

 Items in the process of collection

 Balance with the central bank and other banks


Uses of the Bank Fund
4. Other Function

▪Acquiring quality equipment, technology, furniture etc.

▪Replacement purpose

▪Modernization purpose

▪Maintenance purpose
[Anam/Central Banking/Banking/Chittagong
University]
Bank’s Balance Sheet Identity
 A Bank’s Balance Sheet or Report of Condition has
three elements are Assets, Liabilities and Owner’s
Equity.

 Balance Sheet Identity refers that accumulated uses of


bank funds must be equal with the accumulated
sources of fund. Basically, each use of fund must be
backed by a Source of Fund.
Bank’s Balance Sheet Identity
Total Assets = Total Liabilities + Equities

C + S + L + MA = D + NDB + CA

Here,
C = Cash Assets
S = Security Holdings (Money market and trading account
securities)
L = Loans
MA = Miscellaneous Assets
D = Deposits
NDB = Non-deposit Borrowings
CA = Capital Accounts
Bank’s Assets
1. Cash Assets
Cash and Deposits Due from Bank include:
 Vault Cash
 Deposits with Other Banks
 Cash Items in Process of Collection
 Reserve Account with the Federal Reserve
 Sometimes Called Primary Reserves
Bank’s Assets
2. Security Holdings
 Money Market Securities – Secondary Reserves
 Investment Securities
 Taxable Securities
 Nontaxable Securities
 Trading Account Securities
 Held for Resale Only
 Valued at Market Value
Bank’s Assets
3. Loans
 Gross Loans – Sum of All Loans
 Allowance for Possible Loan Losses
 Contra Asset Account*
 For Potential Future Loan Losses
 Net Loans
 Nonperforming Loans

An account with a balance that is the opposite of the normal balance.


For example, Accumulated Depreciation is a contra asset account, because its
credit balance is contra to the debit balance for an asset account
Bank’s Assets
4. Miscellaneous Assets
 Securities Purchased Under Agreement to Resell
(Repurchase Agreements)
 Customers’ Liabilities on Acceptances
 Net Premises and Equipment
 Other Miscellaneous Assets
Bank’s Liabilities
1. Deposit Accounts
 Noninterest-Bearing Demand Deposits
 Savings Deposits
 Money Market Deposit Accounts (MMDA)
 Time Deposits
Bank’s Liabilities
2. Non-deposit Borrowings

 Securities Sold Under Agreement to Repurchase


(Repurchase Agreements)
 Acceptances Outstanding
Bank’s Liabilities
3. Capital Accounts

 Subordinated Notes and Debentures


 Preferred Stock
 Common Stock
 Common Stock Outstanding
 Capital Surplus
 Retained Earnings (Undivided Profits)
 Treasury Stock
 Contingency Reserve
Off-Balance Sheet Item
Off-Balance Sheet (OBS) items is a term for assets or liabilities
that do not appear on a company's balance sheet.

Although not recorded on the balance sheet, they are still assets
and liabilities of the company.

Off-balance sheet items are typically those not owned by or are


a direct obligation of the company.

Most off-balance Sheet activities are commitments based on


contingent claim

Contingent Claim is an obligation by a bank to provide funds if


contingency realized.
Off-Balance Sheet Item
 Standby Credit Agreements
 Interest Rate Swaps
 Financial Futures and Options Interest-Rate Contracts
 Loan Commitments
 Foreign Exchange Rate Contracts
Income Statement of a Bank

 The Statement of Revenues, Expenses and Profits for a Bank

 Net Interest Income = Interest Income – Interest Expenses

 Net Noninterest Income =


Noninterest Income – Noninterest Expenses
Income Statement of a Bank
Income of Banks
Interest Based
 Interest and Fees on Loans
 Taxable Securities Revenue
 Tax-Exempt Securities Revenue
 Other Interest Income
Noninterest Income
 Service Charges on Customers Deposits
 Trust Department Income
 Other Operating Income
Income Statement of a Bank
Expenses of Banks:
Interest Expense
 Deposit Interest Costs
 Interest on Short-Term Debt
 Interest on Long-Term Debt

Noninterest Expense
 Wages and Salaries
 Other Personnel Expenses
 Net Occupancy Expenses
 Other Operating Expenses
Income Statement

Net Interest Income


- Provision for Loan Loss
Net Income After PLL
+/- Net Noninterest Income
Net Income Before Taxes
Taxes
Net Income
- Dividends
Undivided Profits
Income Statement

Provisions for Possible Loan Loss (PLL)


 Reserve Method
 Experience Method
Fund Flow Statement

 Also Known as the Sources and Uses of Fund Statement


 It asks Two Questions
1. Where Do Funds Come From?
2. How Were Those Funds Utilized?
Fund Flow Statement
Sources of Fund:
 Net Income
 Noncash Expenses
 Decrease in Assets
 Increase in Liabilities
 Increase in Capital Accounts

Uses of Fund:
 Net Loss
 Dividends
 Increase in Assets
 Decrease in Liabilities
 Decrease in Capital Accounts
Fund Flow Statement
Comparison among the Sources of Fund
Question
&
Answer

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