A commercial bank balance sheet shows the value of a bank’s assets, liabilities, and capital on a quarterly or yearly basis. Assets generate revenue and add value to a commercial bank balance sheet. Liabilities are debts or financial commitments that a bank must pay at some point in time. Assets and liabilities share a symbiotic relationship because banks use liabilities to purchase assets that earn revenue. Bank capital is the amount of money a bank would have left if it sold all its assets and used the proceeds to pay all liabilities.
The asset column on a commercial bank balance sheet usually contains three primary categories: cash, securities, and loans. Cash is an integral part of banking. Banks must have cash to supply to clients withdrawing funds, writing checks, or drawing from their line of credit. Most regulatory bodies require banks to maintain reserve funds to ensure solvency. Banks generate cash from fees, check collections, and investments like securities.
Securities are treasuries and bonds that pay interest and allow banks to redeem the principal value at some point in the future. Banks prefer bonds and treasuries over stocks and fixed-income securities for several reasons. First, treasuries and bonds have a higher yield than fixed-income securities. Secondly, they are not as risky as stocks. Finally, they can be sold on the open market quickly if a bank needs to generate more cash.
Loans are typically the biggest asset listed on a commercial bank balance sheet. Banks charge a higher rate of interest for loans than they pay out on deposits. This practice creates the majority of banking revenue. Material loans like those given out for mortgage and automobile purchases can be packaged into asset-backed securities that can be sold to investors to provide more revenue for the bank.
Deposits and money borrowed from other banks for investing endeavors are listed as liabilities on a commercial bank balance sheet. Loans must be paid back at some point. Customers who deposit funds with a bank are essentially loaning funds to the bank until they choose to withdraw. Consequently, deposits cannot be counted as cash assets.
The bank capital column on a commercial bank balance sheet represents the bank’s net worth. It equals the value of total assets minus total liabilities. Bank capital can be increased if the bank’s owners infuse it with cash or the bank issues stock on the open market.