EC223 Lecture Notes - Lecture 20: Interest Rate Risk, Municipal Bond, Repurchase Agreement
Document Summary
General principles of bank management: liquidity, asset, liability, capital, credit risk. A (cid:271)ank"s (cid:271)alan(cid:272)e sheet lists its assets and lia(cid:271)ilities. As the name implies, it balances: total assets = liabilities + capital. Assets are the uses of bank funds. Banks acquire funds by issuing (selling) liabilities. Demand and notice deposits: typically the lowest-cost source of funds. Borrowings: overdraft loans (advances, settlement balances. Deposits (65. 3%: demand and notice deposits. Low cost source of bank funds (32. 5% of total liabilities: fixed-term deposits. Primary source of bank funds (32. 8% of total liabilities) Borrowings (28. 8%: borrowing from the bank of canada: overdraft loans (advances, borrow from other banks (overnight loans), financial institutions and corporations (repurchase agreement, this item has become more important over time. Bank capital (equity and retained earnings, 5. 83%) Reserve: settlement balance (deposits at boc) plus currency held by banks. Desired reserve: banks hold a fraction of their deposits to meet unpredictable cash withdraw.
