Chapter 10: the Economics of Banking

Balance Sheet

is a statement that shows an individual's or a firm's financial position on a particular day.

Asset

is something of value that an individual or a firm owns; in particular, a financial claim.

Liability

is something that an individual or a firm owes, particularly a financial claim on an individual or a firm.

Bank Capital

is the difference between the value of a bank's assets and the
value of its liabilities; also called shareholders' equity

Checkable Deposits

(or transaction deposits) are accounts against which depositors can write checks.

Federal Deposit Insurance

is a government guarantee of deposit account
balances up to $250,000.

Reserves

are bank assets consisting of vault cash plus bank deposits with the
Federal Reserve.

Vault Cash

is cash on hand in a bank (including currency in ATMs and deposits with other banks).

Required Reserves

are reserves the Fed requires banks to hold against demand deposit and NOW account balances.

Excess Reserves

are reserves banks hold above those necessary to meet reserve requirements.

T-Account

is an accounting tool used to show changes in balance sheet items

Net Interest Margin

is the difference between the interest a bank receives on its securities and loans and the interest it pays on deposits and debt, divided by the total value of its earning assets.

Return on Assets (ROA)

is the ratio of the value of a bank's after-tax profit to the value of its assets.

Return of Equity (ROE)

is the ratio of the value of a bank's after-tax profit to the value of its capital.

Leverage

is a measure of how much debt an investor assumes in making an investment.

Bank Leverage

is the ratio of the value of a bank's assets to the value of its capital.

Liquidity Risk

is the possibility that a bank may not be able to meet its cash needs by selling assets or raising funds at a reasonable cost.

Credit Risk

is the risk that borrowers might default on their loans.

Credit-Risk Analysis

is the process that bank loan officers use to screen loan applicants.

Prime Rate

was formerly the interest rate banks charged on six-month loans to high-quality borrowers (now an interest rate banks charge primarily to smaller borrowers).

Credit Rationing

is the restriction of credit by lenders such that borrowers cannot obtain the funds they desire at the given interest rate.

Interest-Rate Risk

is the effect of a change in market interest rates on a bank's profit or capital.

Gap Analysis

is an analysis of the gap between the dollar value of a bank's variable-rate assets and the dollar value of its variable-rate liabilities.

Duration Analysis

is an analysis of how sensitive a bank's capital is to changes in market interest rates.

National Bank

is a federally chartered bank

Dual Banking System

is the system in the United States in which banks are chartered by either a state government or the federal government.

Off-Balance-Sheet Transaction

are activities that do not affect a bank's balance sheet because they do not increase either the bank's assets or its liabilities.

Standby Letter of Credit

is a promise by a bank to lend funds, if necessary, to a seller of commercial paper at the time that the commercial paper matures.

Loan commitment

is an agreement by a bank to provide a borrower with a stated amount of funds during some specified period of time.

Loan Sale

is a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party.

Trouble Asset Relief Program (TARP)

A gov program under which the US Treasury purchased stock in hundreds of banks to increase the banks capital