The format of a bank balance sheet is identical to the balance sheet of other companies, and it’s presented in two columns:
- All of the bank’s assets are detailed in the left column.
- All of the bank’s liabilities are detailed in the right column. The right column also includes the bank’s equity capital.
The total of the right column must equal the total in the left column.
For the sake of simplicity, bank balance sheet format will be presented, assuming the following:
- The bank’s assets (the left column) consist of two items: cash and loans.
- The bank’s liabilities and equity (the right column) consist of two items: bank accounts and equity capital.
Assume also that equity capital is 0.
Loans are assets of the bank since the borrowers are obligated to repay them. Deposits are liabilities of the bank, i.e., the bank owes these funds to the patrons who deposited their money with the bank.
The balance sheet format of Bank A (the only bank in Country A whose reserve ratio is 50%) is shown in the following table.
The balance sheet format of Bank B – the only bank in Country B, whose reserve ratio is 20% – is shown in the following table.
In both countries, bank deposits (banks accounts) total $1,000. Because of the difference between the minimum reserve ratios, Bank A is required to keep 50% of its deposits in cash, and can loan the remainder, while Bank B is required to keep only 20% of its deposits in cash, and can loan its remaining balance.
Table 7.2
Bank A’s Balance Sheet
|
Assets |
Liabilities |
|
Cash $500 |
Deposits $1,000 |
|
Loans $500 |
Equity Capital $0 |
|
Total $1,000 |
Total $1,000 |
Table 7.3
Bank B’s Balance Sheet
|
Assets |
Liabilities |
|
Cash $200 |
Deposits $1,000 |
|
Loans $800 |
Equity Capital $0 |
|
Total $1,000 |
Total $1,000 |
The Reserve Ratio (Presented Again)
The reserve ratio determines how much money a bank is required to hold in its vault for every $1 on deposit with it:
-
If the reserve ratio is 50%, then the bank must keep $0.50 in the vault for each $1 on deposit. If the bank has deposits totaling $1 million, then it must keep $0.5 million in the vault.
-
If the reserve ratio is 20%, then it must keep $0.20 in the vault for each $1 on deposit. If the bank has deposits totaling $1 million, then it must keep $0.2 million in the vault.
